
Class _JiEjJL6^. 

Book . H 2 

Copyright W^ ^ 



COPYRIGHT DEPOSir. 



MERCANTILE CREDIT 



BY 

JAMES EDWARD HAGERTY, Ph. D. 

OHIO STATB UNIVERSITY 



m 






^ 



NEW YORK 

HENRY HOLT AND COMPANY 

1913 






(x>^ 



Copyright, 1913 

BY 

Henby Holt and Company 



/ 



^^ 



©GI,A35 486 9 



PREFACE 

^This volume represents an attempt to discuss one 
branch of the credit family, Mercantile Credit. The 
theory of credit, and the different kinds of credit are 
considered only in so far as the treatment of these sub- 
jects makes more clear the nature, scope, and functions 
of mercantile credit. Bankruptcy legislation has to do 
largely with those who give and those who receive mer- 
cantile loans, and for this reason it has been considered 
of sufficient importance to warrant treatment. 

While treating mercantile credit from a theoretical 
standpoint, an attempt is made to view the problems of 
mercantile credit as far as possible as a business man 
would view them. For this reason the author has de- 
scribed with much detail the work of the credit man, the 
organization of his office, the sources of credit information, 
the forms he uses to secure this information, and the 
principles which govern him in the granting of credit. 
He also discusses at considerable length the development 
of legislation with reference to credit, and the attitude of 
credit men toward this legislation. 

Since economic phenomena should be viewed in the 
same way as phenomena in any other science, it is the 
first task of the economist to state clearly and to describe 
accurately the facts which come within the scope of his 

v 



vi PREFACE 

investigation and then interpret them in the light of 
economic knowledge. In this volume the author has at- 
tempted to do this. 

This book is intended primarily for students in the 
colleges or schools of commerce, for those engaged in the 
many phases of credit work, and also for those who are 
interested in the general subject of credit. 

Chapters IV, VI, VIII and XIV were pubUshed in 

whole or in part in the American Journal of Accountancy, 

and acknowledgement is made to the editors of this 

magazine for their courtesy in permitting the use of the 

material of these chapters in this volume. The writer 

acknowledges his indebtedness to his colleagues in the 

Department of Economics and Sociology of the Ohio 

State University for helpful criticisms, and especially 

to Mr. B. G. Watson, the secretary of the Columbus 

Credit Men's Association, who read several chapters of 

the manuscript and offered many helpful suggestions. 

James Edward Hagerty. 
Ohio State University, Columbus, Ohio. 
June, 1913. 



CONTENTS 



PART I 

Origin, Development and Present Status of 
Mercantile Credit 

CHAPTER I 
Theory and History of Credit 

Pagh 
Definition of Credit, Credit Transaction and Credit System — 
Credit and the three periods of economic development 
— Credit in Rome — The Code of the XII tables — Credit 
in Babylon — Credit and the Great Fairs — Medium of Ex- 
change — Function of credit — Credit of General Accepta- 
biUty and credit of Limited Acceptability — Credit instru- 
ments — Essential characteristics of Credit — Confidence 
as a basis of loans — Relation between credit, money and 
goods — What limits the amount of credit — Credit not 
Wealth or Capital 3 

CHAPTER II 

Credit Instruments 

Two classes of credit instruments, (1) Promises to pay and 
(2) orders to pay — Definition and uses of Promissory 
Notes, Bank notes , book accounts, stock certificates, 
bonds, checks — The travelers check, letters of credit. Post 
office Money orders, bank drafts, Bills of Exchange, Drafts, 
Bills of lading and warehouse receipts 19 

CHAPTER III 
Kinds of Credit 

Different classifications of credit — Banking credit — Functions 
of modern banks — Credit creation — Relation between 
vii 



1/ 



viii CONTENTS 

Page 
banking and mercantile credit and between banking and 
personal credit — Setting of credit standards — Accommo- 
dation paper — ^Loans on collateral — Credit departments. 

Public credit: Floating loans — Paper money — Causes of Pub- 
lic Debts. 

Investment credit: Its extent — Stocks and Bonds — Invest- 
ments and Public Credit — Investment and mercantile 
credit — Kinds of investment credit 37 

CHAPTER IV 

Mercantile Credit 

Dependence of mercantile on banking credit — Who receive 
mercantile credit — Changes in granting mercantile credit 
— Sources of credit information — Terms of credit — Rates 
of discount — Mercantile rates of interest high — Credit in- 
struments — Note brokers — Book accounts — Methods of 
lending on book accounts — Dating ahead and its in- 
fluence on credit 54 

CHAPTER V 

Personal Credit 

Definition — Personal and mercantile credit compared — 
Personal and banking credit compared — Changes in giv- 
ing personal credit — Classes that receive personal credit — 
Mercantile houses which give personal credit — Factors 
determining the granting of credit by retailers — Granting 
of credit and extravagance — Credit given by company 
stores and installment houses — The consumer bears the 
burden of unwise credit 75 

CHAPTER VI 

The Credit Man 

The organization of mercantile industry — The work of the 
credit man — Sources of information — Charac4;er of the 
knowledge the credit man should possess — Book-keeping 
and credit — Bank and mercantile credit — The signed 
statement — Importance of work of credit man 90 



CONTENTS ix 

Page 

CHAPTER VII 

Credit Office 

Purposes of system — A typical system — Wherein office sys- 
tems differ — Credit inquiry forms — Property statements 
— Property forms — Traveling salesmen and local attor- 
neys as sources of credit information — Comparative prop- 
erty statement forms — Credit limitations — Credit depart- 
ments of banks 108 

CHAPTER VIII 

Sources of Credit Information 

mercantile agencies 

What the agency does — Industrial conditions responsible for 
the agency — Failure of early methods of granting credit — 
Origin of agencies — Development of agencies — Organiza- 
tion of agencies — Control of territory by district offices — 
Organization of foreign offices — Methods of securing credit 
information — Classifying, fiUng and distributing informa- 
tion — Magazines of the agency — Value of the agencies. . 134 

CHAPTER IX 

Sources of Credit Information 

general sources 

Salesmen: Differences between salesman and credit man — 
Salesman as collector — Inquiry blanks — Attorneys — 
Method of securing information from attorneys — Banks, 
kind of information obtained from them — Traveling 
credit representatives — Methods by which they secure 
credit information 158 

CHAPTER X 

Sources of Credit Information 

credit exchange 

Credit exchanges developed in last 15 years — Exchange of 
ledger information — The New Orleans and Minneapolis 



X CONTENTS 

Page 

systems — Two classes of bureaus to-day — The card index 
system — The credit report system — Credit exchange 
bureaus of retail merchants associations — Retail grocers 
credit exchange bureaus 170 

CHAPTER XI 

Adjustment Bureaus 

Origin of adjustment bureaus and their aims — Value of adjust- 
ment bureaus — Ordinary methods of closing estates — 
How estates are closed by adjustment bureaus — Plan of 
organization — Three methods of organization — Relation 
of National Association of Credit Men to bureaus — In- 
come from adjustment bureaus — Costs of closing estates 
by adjustment bureaus — Distribution of bureaus — Con- 
clusions reached at conference of adjustment bureaus 
managers 184 

CHAPTER XII 

Collections 

Relation of collections to a credit department — Qualifications 
of a collector — Office system in retail methods of collect- 
ing accounts — Classes of accounts — Methods of collecting 
accounts 200 

CHAPTER XIII 

Mercantile Credits and Depressions 

Channels of distribution — Methods of giving mercantile credit 
— Over-trading — Influence of rising and faUing prices on 
credit — A cause of the crisis of 1893 — Number and extent 
of mercantile institutions — Changes in the character of 
commodities produced 211 

CHAPTER XIV 

Credit Men's Association 

History of National Association of Credit Men — Its origin — 
Purposes — Membership — Difference in work of national 



CONTENTS xi 

Page 
and local associations — Work of committees — Co-opera- 
tion of National and local associations in having State 
laws passed — ^Local associations of credit men — Their 
purposes and methods 225 

PART II 
Legislation 

CHAPTER XV 
Bankruptcy Legislation 

Contracts of primitive peoples — Early legislation with refer- 
ence to debts — Modern views with reference to the rela- 
tions between debtors and creditors — Modern States regu- 
late relations between debtors and creditors — Insolvency, 
simple bankruptcy, and fraudulent bankruptcy — Bank- 
ruptcy proceedings — Preventive compositions — Treat- 
ment of bankrupts in different countries 247 

CHAPTER XVI 

The Bankrupt Law of 1800 

National bankrupt laws — Right of National Government to 
legislate on bankruptcy — Principles in bankruptcy legisla- 
tion of progressive countries — ^Law of 1800 limited to 
traders — Blackstone's views on bankruptcy — Who could 
be declared bankrupts under law of 1800 — Bankruptcy 
proceedings — Amount of property allowed a bankrupt — 
Reasons for retaining the law — Why the law was repealed. 257 

CHAPTER XVII 

Bankruptcy Act op 1841 

Proposed bankruptcy acts and what they aimed to accomplish 
— Why traders made a special class — Foreign experience 
— New York's insolent laws — Purposes of a bankrupt law 
-^Supreme Courts decisions on bankrupt and insolvent 
laws — Crisis of 1837 — Provisions of Act of 1841 — Volun- 



xii CONTENTS 

Paob 
tary bankruptcy — Involuntary bankruptcy — Preferences 
and penalties for them — Assignees and their duties — 
Courts having jurisdiction — Strength of law — Reasons 
for its repeal 273 

CHAPTER XVIII 

Bankruptcy Act of 1867 

Agitation for a third bankrupt law — Law of 1867 a compromise 
measure — Administration of the law — Attempt to make 
the courts accessible to the people — Registers appointed 
by district judges when recommended by the Chief Justice 
of the United States — Voluntary bankruptcy — Selection 
of assignees and their duties — Discharge — Involuntary 
bankruptcy — Control of debtor's estate by creditors — 
Defects of the Act of 1867— The Amendments of 1870 and 
1874 — Repeal of the law and why it was a failure. . . . 293 

CHAPTER XIX 

Bankruptcy Act op 1898 

Conventions to formulate a bankruptcy law — Purposes of pro- 
posed measure — Act which passed was a compromise 
measure — The five acts which either make a debtor a bank- 
rupt or which give grounds for bankruptcy proceedings — 
What a bankrupt is required to do — His privileges — A 
county the administrative unit — Trustees, their duties 
and compensation — Debts which have priority — Interests 
of debtors and creditors contrasted — Elements of strength 
in the law — Its weak features — Advantages of a good 
voluntary law — Amendments of 1903 and 1910 — Composi- 
tions — Corporations may become voluntary as well as 
involuntary bankrupts — Attempts to repeal law of 1898 — 
Advantages of a National bankrupt act 316 

CHAPTER XX 

State Insolvency Legislation 

Bankruptcy and the constitution — Why State insolvency laws 
are inadequate — Voluntary and involuntary insolvency 



CONTENTS xiii 

Paqb 
laws — Methods of procedure in each case — Voluntary- 
insolvency in Utah and Oklahoma — Conditions of dis- 
charge in different states — Bankruptcy in New England — 
Insolvent laws in Texas, Georgia, and Lousiana 345 

CHAPTER XXI 
Laws Regulating the Sale op Goods in Bulk 

Bulk sales' laws passed as a result of systematic campaign — 
Chief abuse which bulk sales' laws correct — Provisions of 
model law — ^Louisiana bulk sales' law drastic in character 
— What most bulk sales' laws require — Bulk sales' laws of 
Oregon, Connecticut, and South Carohna — Acts passed 
by Nebraska, North Carolina, and Nevada in 1907 intro- 
duce new features — Some laws declared unconstitutional 
— In most instances Supreme Court decisions sustain bulk 
sales' laws as constitutional 357 

Index 379 



PART I 

ORIGIN, DEVELOPMENT AND PRESENT 
STATUS OF MERCANTILE CREDIT 



CHAPTER I 
THEORY AND HISTORY OF CREDIT 

No economic term has been given a greater variety 
of meanings, even by economic writers, than the term 
credit. This fact makes it important at the beginning of 
an economic study to state clearly the meaning which 
the term is intended to convey. For purposes of the 
present discussion, credit means " the power to 
secure commodities or services at the present a^ ^' 
time in return for some equivalent promised 
at a future time."^ Closely allied to the meaning of 
credit is a credit transaction which is "a transfer of 
goods, services, or money, for a future equivalent."^ 
The credit system may be defined as the great variety 
of means by "which transactions in credit are conducted, 
and the tremendous volume of debts and credits are 
brought into being, passed from hand to hand in the 
routine of business, and finally Uquidated."^ 

In the business world a man has good credit if he 
always pays his debts when due. To the bookkeeper 
credit means that something is owed on an account.* 
Credit is given people in general when they do some- 

^ C. J. Bullock: Introduction to the Study of Economics, 
2 Ely: Outlines of Economics. 
^ Prendergast : Credit and lis Uses. 
* Johnson : Money and Currency. 

3 



4: MERCANTILE CREDIT 

thing upon which society places a favorable estimate. 
Among the economists we also find a variety of defini- 
tions: Mill defines credit as "the permission to use 
another's capital." Macleod defines it as ''the present 
right to a future payment.'' Fawcett defines it as ''the 
power to borrow money." Laughlin defines it as 
"machinery invented to aid in accomplishing the pur- 
poses of capital." The differences of opinion among the 
economists as suggested by these definitions are more 
apparent than real, for their discussions of credit show 
them to be at variance only on minor matters, and these 
come into the foreground only when the author attempts 
to establish certain theories with reference to the impli- 
cations of credit. 

Professor Hildebrand, one of the founders of the 
German Historical School of Political Economy, in treat- 
ing of economic evolution, says that credit 
credit ao- ^^mes relatively late in economic development, 
pears in His three periods are those of natural econ- 
economic omy, money economy and credit economy, 
eve op- jj^ ^j^^ £^g^^ people consumed what they pro- 
duced; or where exchange occurred, it took 
the form of barter. In the second stage, money econ- 
omy, exchange played an important role in economic 
life and money as a medium of exchange faciUtated 
the selhng and buying of goods. The third period 
of credit economy was characterized by deferred 
payments, loans, etc. 

It cannot be maintained that each of these periods 
existed exclusively of the others. From the point of 



THEORY AND HISTORY OF CREDIT 5 

view of historical development there may be an ad- 
vantage in considering these periods as emphasizing a 
certain class of phenomena. Among primi- 
tive peoples a simple form of credit existed as ^.} * 
soon as barter came into existence and this 
was a phenomenon almost as important as barter itself. 
From the records of all primitive peoples we have an 
abundance of evidence to establish this. Lending food 
was everywhere common. It was a common practice for 
those who were successful in the chase to lend game or 
food to those who were unsuccessful. This was treated 
as a loan which the borrower was to return after the 
next hunt. The credit was in the form of an under- 
standing and this simple method of credit has persisted 
to the present. In early historical times the loaning 
of cattle and other domestic animals was common, and 
even to-day in rural communities the loaning of corn 
and household provisions to neighbors is a common 
practice. 

This simple form of credit, nowever, nas no import- 
ance in the modern system of credit. The beginnings 
of our present system of credit are difficult to trace. 
H. D. Macleod^ maintains that "the whole system of 
credit, banking and bills of exchange, was originated by 
the Romans, and a long series of illustrious lawyers had 
brought the theory of credit to a state of absolute per- 
fection: and their doctrines were embodied and declared 
to be law in the great code, or digest of roman law, 
called the Pandects, published by Justinian in the early 

* H. D. Macleod: Theory and Practice of Banking, p. 159. 



6 MERCANTILE CREDIT 

part of the sixth century. They were adopted and 
confirmed in the Basilica, the Reformed Code promul- 
gated by the Basilian dynasty in the tenth century: and 
they have been the mercantile law of Europe, except 
England, for 1,300 years. They are fully set forth in all 
the great continental jurists: but, from that unfortunate 
aversion which the common lawyers of England so long 
entertained against the Civil Law, they were compara- 
tively unknown in this country : though adopted in equity : 
and they have never yet found their way into any treatise 
on Political Economy either, foreign or English." The 
same author maintains that the Roman lawyers brought 
the theory of credit to perfection as early as the sixth 
century. He furnishes us with an abundance of evidence 
concerning the forms and uses of credit during the first 
part of the mediaeval period. He states that ''when the 
practice of writing became common at Rome, it was 
established as a custom, or law, that every Dominus, or 
head of a house, should keep a family ledger as strict 
and exact as those of a modern banker. In this he was 
obliged to enter all his receipts and disbursements: 
all sums of money borrowed and lent: all trade profits 
and losses; and these family ledgers were the only legal 
evidence of debt among Roman citizens received in 
courts of justice. And it was from these family ledgers 
that the whole modern system of Book-keeping and 
Credit has been developed."^ 

In lending money, actual contracts were made by for- 
mal ledger entries in which both creditors and debtors 

* H. D. Macleod: Theory and Practice of Banking, p. 163. 



THEORY AND HISTORY OF CREDIT 7 

made entries in their respective ledgers by mutual con- 
sent, "in the year 469 A D., the Emperor Leo abolished 
the strict formalities of the Stipulation, and en- 
acted that a consent given in any form what- j/® 
ever, so long as the parties agreed about it, 
should be valid. ^ There was no necessity for any writing 
or any witnesses." Bills of exchange were used in 
foreign credit in the time of Cicero, as his writings bear 
ample testimony. At the time of the Roman Conquests, 
these were invented by Roman bankers who established 
correspondents abroad, and bills were given on these 
correspondents when Romans traveled abroad or when 
it was desired to meet obligations away from home. 
The family ledgers gradually fell into disuse and by the 
time of Justinian they were discontinued entirely. A 
documentary acknowledgment of a debt known as a 
cawtia and a formal contract or promise to pay, a 
cheirographum, had taken its place. These were 
transferable. 

Under the Code of the XII Tables, debts could not be 
sold, or rather the purchaser of an account could not bring 
action in the name of another to collect it. 
However, if the debtor agreed that the creditor * d M ^ 
might transfer his right of action, it could be 
done. Both in Roman and in English law, creditors 
began to establish devices by which they could sell debts 
without the consent of their debtors. The Emperor 
Alexander Severus in 224 A. D. published a constitution^ 

^ H. D. Macleod: Theory and Practice of Banking, p. 168. 
2 Macleod: Theory and Principles of Banking, p. 208. 



8 MERCANTILE CREDIT 

"by which the absolute freedom of the sale of debts 
without the knowledge or consent of the debtor was 
recognized and allowed/' This practice has been recog- 
nized since as a principle of the mercantile law of Europe 
except in England. The earliest bills of exchange con- 
tain no statement of negotiability, yet they have been 
from the outset negotiable in all Europe except 
England. 

At the present time the laws of Scotland do not re- 
quire a statement of negotiability on a bill of exchange or 
promissory note to make it salable. This is because 
the common law of Scotland has adopted the general 
mercantile law of the continent. On the other hand, 
the common law of England is the early Roman law and 
a bill of exchange or promissory note to be salable must 
be drawn payable to order or to bearer. As the United 
States follows the common law of England, with reference 
to negotiable instruments, bills of exchange and promis- 
sory notes must be made out payable to order or to 
bearer to make them salable. 

The early banking system of Greece and Rome un- 
doubtedly gave rise to the institutions of credit and of 

banking in mediaeval and modern Europe, 
re 1 m However, good authors claim that everything 

of value in banking and in credit in Greece and 
Rome was preceded by similar institutions in Babylon 
several hundred years before Christ. The early bankers 
of Babylon were more than changers, as they received 
money on deposit, paid interest for it, and loaned it for 
commercial enterprises. 



THEORY AND HISTORY OF CREDIT 9 

In mediaeval times, throughout Europe merchants 

brought their surplus products to great markets or fairs 

andthere exchanged them for the surplus prod- , „ 

Influence 
ucts of other countries/ These products were ^f credit 

bartered, the merchants bringing with them on the 
metals which were used in settHng balances. Great 
To facilitate exchange, money changers estab- 
lished places of business at these markets and thus made 
possible a money economy in place of the system of 
barter. By degrees the great merchants learned that it 
was imnecessary to bring their goods to the fairs; that 
instead of doing so they could send their products directly 
to the purchasers and secure their pay by writing bills of 
exchange. We have already seen that foreign bills of ex- 
change were used to facihtate travel and to pay debts in 
foreign countries in the early part of the Christian era. 
Their use to facilitate foreign trade by introducing a 
means of payment for exported goods came much later. 
At j&rst the bill of exchange was drawn by the money j v^< 
brokers and bankers who had agents abroad. By the lyp**'"^ ' 
end of the fourteenth century it had attained its present v^^'^^^^'^^t^'^ 
use in England.^ ^ 'Kt^^ 

The essential feature of credit is the exchange of goodSjIT*^^"^ ^ ^^ 




services, etc., for a promise to pay in the Medium of 

future. In the performance of this function exchange /) /, J 

it is an important medium of exchange. Its function 

great use, however, consists in its service in ^ ere i . 

transferring capital. In economic treatises in recent 

1 Encyclopsedia Britannica. 

2 See Cannonists. 



10 MERCANTILE CREDIT 

years the medium of exchange function of credit has 
received most attention. This is due to the amount of 
attention that has been given to the subject of money 
because nations have assumed that it was necessary to 
adopt a policy with reference to their coinage system 
involving the use of two metals or one as the basis of 
the monetary system. Supplementing the use of money, 
the influence of credit in determining prices naturally 
received a great amount of attention. 

Into the subject the influence of credit as a means of 
exchange, it is not our purpose to go in any detail. 
However, its importance warrants brief consideration. 
To the extent that money is an improvement over barter 
in effecting exchanges, to the same extent is credit an 
improvement on money. 

Professor Johnson, ^ in treating of credit as a medium of 

exchange, divides it into (1) credit of general acceptability 

and (2) credit of limited acceptability. The 

"^^^ former, or credit money, includes those in- 

classes 

of credit, struments of exchange which all people of a 

country are willing to accept, such as the green- 
back, the bank note, the silver dollar and the silver cer- 
tificate. They consist of those instruments of exchange 
whose value depends upon faith in their convertibility; 
that is, the belief that the government or agency which 
issues them, or is responsible for them, will accept them 
in exchange for real money. For all practical purposes 
these instruments of exchange are money. 

The instruments of credit of limited acceptability 

^ Money and Its Uses, pp. 2 and 44. 



THEORY AND HISTORY OF CREDIT 11 

have use as a medium of exchange in a restricted field. 
*'They include the promissory note, the bill of exchange, 
various forms of bank credit and the book accoimt." 
These instruments, the real instruments of credit, are 
limited in scope, but to a large extent they dispense with 
the need for money. All large payments of money are 
made by check or draft, and practically all payments due 
in foreign countries are made by foreign bills or drafts. 
The great bulk of the exchanges of a country is effected 
by these means. The industrial prosperity of the 
country would be greatly retarded if it were not for these 
instruments for effecting exchanges. 

The extent to which these instruments are in use in 
the various countries as a medium of exchange depends 
somewhat on the habits of the people, the de- 
cree of confidence which business men have in ^^^^ 

. governs 

each other, and also the condition of pros- ^j^g extent 

perity. On the continent of Europe people to which 
are much less inclined to pay bills by writ- credit in- 
ing checks against deposits in banking institu- ^^ ^^^^^ 
tions than English and American people 
are. This is due to their conservative habits. In 
prosperous times people use credit instruments to a 
much greater extent than in periods of depression or 
of inactivity. Relatively speaking, where free use is 
made of credit instruments as a means of exchange, 
but little use is made of money, and where but little use 
is made of credit instruments, money must be freely 
used. 
The area over which credit instruments are used as a 



12 MERCANTILE CREDIT 

means of exchange is limited by the area over which 
business men have confidence in each other. Conse- 
quently the larger the area of business confidence the 
greater will be the resort to credit instruments for this 
purpose. 

As has been stated, the great function of credit is to 

promote the production of wealth and to facilitate the 

exchange of capital. It consists in the ex- 

The chief change of commodities, money or services, 
functions . ® . . , « r^. 

of credit. ^^^ ^ promise to pay m the future. The 

various producing industries — mining, manu- 
facturing, agriculture, mercantile and transporting — 
must secure raw materials, machinery and other instru- 
ments of production as well as funds for building and 
other purposes. This is advanced at the outset by 
investors as capital credit, and later the various in stitu- 
tions engaged in production find it necessary to secure 
funds, usually from banking institutions, in exchange for 
their promise to pay. Public credit is also to an in- 
creasing extent used to secure funds for productive 
purposes. 

The use of credit funds for exchange and production 

purposes may be seen from the following illustrations 

from the manufacturing industry. The manu- 

® facturer engaged in the production of ma- 

lustrated. chines has not sufficient capital, raw materials, 
machinery and fimds to employ laborers to 
carry on the productive process until his products, 
the machines, are sold. He goes to the producer of 
raw materials and asks him to exchange the raw materials 



THEORY AND HISTORY OF CREDIT 13 

for a promise to pay at a time usually when his products 
are sold. If his credit is good, he secures the raw material 
and gives in exchange his promise to pay a sum which is 
somewhat more than the present value of the raw 
materials. This amount, known as interest, which is 
greater than the present value of the goods sold, is to 
compensate the seller for waiting for his money, and is a 
large or small amount as the risk of not being paid is 
great or small. 

To carry on the productive process it is necessary 
to employ many workers who labor for wages which 
are usually paid weekly or who labor for salaries which 
are usually paid monthly. If the manufacturer has 
good credit the wage earners will advance their services 
throughout the week for a promise to pay at the close of 
the week; and those who work for salaries will advance 
their services during the month for the promise to pay 
at the close of the month. The contracts for these 
credit transactions may be written, but in the great 
majority of cases they are oral but are none the less 
binding on that account. 

The same manufacturer must secure an advancement 
of money or funds from banking institutions because he 
must pay his labor before he can realize on the goods 
they are producing and often because in selling his 
goods he must wait several months before he can secure 
his pay for them. The banker whose function is to 
deal in credit, advances money or the right to draw 
funds at any time in exchange for the promise of the 
manufacturer to pay in the future. 



14 MERCANTILE CREDIT 

Professor Laughlin^ is right in insisting that if "an 
essential function of capital is to discount the future, 
the essential characteristic of credit is the element in 
Essential ^^ ^^ futurity.'* Any transaction which does 
character- not involve the promise or the obHgation to 
istic of pay in the future is not a credit transaction. 
A barter or a cash sale in which the transac- 
tion is closed, is just the opposite of a credit transaction 
which calls for payment in the future. 

There ought to be no reason for a quarrel between 
Professor Laughlin in claiming that the essential thing 
Confi- ^ credit is futurity and those who insist on 

dence as a the importance of confidence in credit. Each 
basis of plays an important although a distinct role, 
oans. Futurity is the distinctive factor in credit 

itself, while confidence lies at the basis of the granting 
of credit. Professor Laughlin himself makes this dis- 
tinction, but unfortunately in the minds of his critics 
he assigns to confidence a subordinate role. In mercan- 
tile credit confidence is especially important. The 
seller of goods accepts the promise of an individual with- 
out means to pay only (1) when he has confidence in his 
ability to pay and (2) when he has confidence in his 
willingness to pay in the future. These two factors 
are important in all mercantile loans. A commercial 
loan is not based on goods as many suppose. The 
goods advanced are offered for sale by the purchaser 
and the original seller has no specific claim on them 
or on the proceeds of their sale only in exceptional 

* Laughlin: The Principles of Money, p. 73. 



THEORY AND HISTORY OF CREDIT 13 

cases. Confidence in willingness and in ability to pay 
are the foundations of all mercantile credit. In bank 
loans where collateral is demanded and in all mortgage 
loans, the situation is different. In these cases, the one 
who accepts a promise to pay receives with it securities 
which insure payment when the debt is due. However, 
bank loans based on collateral are decreasing in impor- 
tance as contrasted with loans made to corporations and 
business houses based on their credit standing and their 
ability to pay their debts. 

The dispute as to whether credit is based on money 
or goods, whether it is a demand for money or for goods 
is not important for our purposes here. ^ p , x. 
description of the relation between credit and between 
money and credit and goods will suffice. As credit, 

has been stated a credit transaction is the ^^^^Y* 

, « J .J. . and goods, 

exchange of goods or services for a promise 

to pay in the future. The promise to pay is usually 
expressed in terms of money. This credit transaction is 
also usually completed by the payment of money, credit 
money or a title to money. When a bank borrows 
money for thirty or sixty days time, it may cancel the 
debt by paying gold, credit money, or by a book credit, 
giving the lender the right to draw money. However 
the debt may be paid, the contract in the United States 
calls for its payment in dollars of 23.22 grains of pure gold, 
and the lender may demand payment in gold if he chooses 
to do so. So far as the credit transaction is concerned, 
there can be no question that the contract calls for pay- 
ment in money. 



16 MERCANTILE CREDIT 

All convertible or credit money is a demand for money, 
and it gives its possessor the title to this money — which is 
a commodity and has real value. Of course the purpose 
in securing money is not on account of any satisfaction 
which money may give, but because of the goods it will 
buy. When a merchant or manufacturer sells goods 
and accepts a promise to pay money, what he desires 
ultimately is not money, but production or consumption 
goods. The same is true of the laborer who works for 
wages and all others who contribute something to the 
productive process. What they want is not money but 
what money will buy, the necessaries and luxuries of 
life and the means of production. 

The contention that credit is based on goods and 
is limited to the amount of goods in existence is not 
What wholly correct. In the case of a mercantile 

limits the loan, the sale of goods on time, it will be seen 
amount of later how funds may be advanced to several 
^^^ ' times the value of the goods. In mortgage 
loans and loans based on the deposit of collateral, the 
loan is definitely limited by the quantity of property 
or wealth the borrower has. In most cases, however, 
the loans are based not only upon the quantity of prop- 
erty the borrower has, but upon the lender's confidence 
in his integrity and in his ability to produce. As 
Professor Johnson puts it, " Credit is limited, therefore, 
not by a community's wealth, but by that plus lenders' 
estimates of its power to produce wealth."^ 

Although credit makes possible an increase in the 

* Johnson: Money and Currency, p. 38. 



THEORY AND HISTORY OF CREDIT 17 

production of wealth and facilitates the utilization of 
capital, it is neither wealth nor capital. Much 
misunderstanding exists among competent ?Aj 
authors on this point through a failure to ap- capital, 
preciate the real significance of economic 
terms, especially wealth and capital. 

Wealth consists of economic goods. Capital goods 
consist of the economic goods used in the production of 
wealth. Credit which has been defined as 'Hhe power 
to secure commodities or services at the present time in 
exchange for some equivalent promised at a future time" 
is no more wealth or capital than is labor power or 
organizing ability. Labor power contributes greatly to 
the wealth and capital of a country but it is not for 
that reason capital. Organizing ability also increases 
wealth and capital but it is not for that reason either 
wealth or capital. The division of labor has been one 
of the greatest factors in the increase of the wealth of 
society, but the division of labor is never thought of 
as wealth or capital. The credit transaction which 
consists of an exchange of goods or services for a promise 
to pay does not increase the sum total of economic 
goods. It simply means an exchange of possessors. 
Although many credit instruments may be exchanged, 
the actual means of satisfying wants have not been 
increased by the process. 

We may admit the statement of Daniel Webster that 
"credit has done more a thousand times, to enrich nations 
than all the mines of all the world,'' without conceding 
that it is either wealth or capital. What then is the 



18 MERCANTILE CREDIT 

function of credit? As Levasseur puts it, "Admit in 
summing up this analysis, that credit strictly speaking, 
creates nothing, that it is simply a displacement of 
capital; nevertheless in transporting capital to a place 
where it can be employed most profitably, in furnishing 
tools to labor, in rendering active that which was 
inactive, and fertilizing that which was sterile, this 
simple displacement introduces a profound modification 
into the economy of society, it renders production more 
active and increases wealth/'^ 

1 Elements of Political Economy, p. 208. Translated by T. 
Marburg. 



CHAPTER II 
CREDIT INSTRUMENTS 

A CREDIT transaction is one in which something of 
value is exchanged for an obligation to pay in the future. 
A credit instrument is the evidence of this ob- 
ligation. It may be exchanged for economic ^ 
goods in which case it constitutes a demand 
on the part of its possessor for the payment of the obli- 
gation at maturity or, like the book account, it may be 
simply a record of the contractual relations between 
debtors and creditors. One writer prefers the use of 
"instrumentalities rather than instruments, to cover 
cases of orders and promises by telegram and telephone."^ 

Credit instruments may be divided into (1) promises 
to pay and (2) orders to pay. The chief promises to 
pay are promissory notes, bank notes, de- 
posits, book accounts, stock certificates, bonds, classes of 
etc., and the chief orders to pay are drafts, credit 
bills of exchange, checks, circular letters of ^'^stru- 
credit, post-office orders, mobilizing certificates 
of all kinds such as warehouse receipts, bills of lading, etc. 

A promissory note is a written promise to pay a 
certain sum of money at a future time under definite 
conditions. Promissory notes are frequently exchanged 
for goods or funds. They are among the most com- 

* Andrews: Institutes of Economics, p. 143. 

19 



20 MERCANTILE CREDIT 

mon of credit instruments. A man whose credit is good 

may exchange his promise to pay in the form of a 

promissory note for goods, or for money or 

The pro- other funds. They are made either negotia- 

missory . . 

note. ^^® ^^ non-negotiable. If the note is made 

payable to a particular person without order 

or bearer on the note, it is non-negotiable. If it is made 

payable to order or to bearer, it is negotiable. The 

negotiable promissory notes are the most common form 

of note credit instruments. They are used freely in the 

payment of debts, and consequently may be transferred 

a great many times, and on this account perform all the 

functions of money. When sold, they must be endorsed 

by the person to whom the note is ordered to be paid. 

The endorsement may be either in blank or special. 

The former specifies no indorsee and an instrument 

so indorsed is payable to bearer and may be sold on 

delivery. A special indorsement indicates the person 

to whom or to whose order the note is to be paid, and 

must be endorsed by such person before it can be sold 

again. 

The promissory note was used early in the history 

of credit transactions. It is now the most common 

instrument used for the transfer of funds. In 

Use of the ^Yie United States prior to the Civil War when 

promis- 11. 

sory note, goods were sold on time, except by retailers, 

the promissory note was almost invariably 

used. Even since the Civil War it has been used for 

this purpose more than any other instrument of credit. 

On account of its ease of negotiability it serves this 



CREDIT INSTRUMENTS 21 

purpose well as it often passes through many hands 
before it is finally paid. 

A bank note is a bank's promise to pay the bearer 
the amount specified on its face. As it is intended to 
pass freely from hand to hand, it is a credit 
instrument of general acceptability. The free- 
dom with which it circulates at its face value 
depends upon the general credit standing of the banking 
institution or upon special provisions made for the 
redemption of the note circulation of banks. It is well 
known that the note issues of private and state banks 
in the United States before the Civil War fluctuated 
greatly in value, while the national bank notes issued 
in accordance with the National Banking Act of 1863 
are absolutely safe owing to the use of United States 
bonds pledged to their redemption. In other countries 
as Canada where bank asset currency prevails, bank 
assets may be used in such a way as to make bank notes 
practically safe. 

A bank deposit imposes on a banking institution the 
same obligation as the bank note. Both are promises 
of the bank to pay on demand. In the case 
of bank deposits, the only record which deposi- ® °° 
tors have of the obUgations of the bank, is in 
the books of the bank and in the pass book in possession 
of the depositor, which contains a copy of the bank-book 
record. The depositor in this case exchanges funds for 
the promise of the bank to pay on demand, in which 
case the credit instrument is a book account which the 
bank keeps. For purposes of collection this account 



22 MERCANTILE CREDIT 

or credit instrument is as valuable as any that are 
recorded. 

In the use of the book account as an evidence of debt 
one person may exchange money and other property for a 
credit upon books. That is a right of action on the part 
of one who exchanges something valuable is secured 
against the individual who receives it. Common cases of 
book accounts are those used by the retailer when he 
sells goods to a consumer, or by a banking institution in 
making a record of deposits. In the former case, the 
retailer exchanges goods for a promise to pay, which 
evidence is on the books of the retail institution. This 
record of the debt gives the retailer a right of action 
against the receiver of goods for the value of the goods as 
indicated by the books. The book account is as valuable 
a credit instrument as any that is used. It does not, 
however, serve the purpose as a medium of exchange 
or serve the purpose of paying many obligations the 
same as checks or other credit instruments to be con- 
sidered later. However, the book account may be 
sold and the purchaser of the book account has the 
same right of action against the debtor as the original 
creditor had. When a retail business is sold, the book 
accounts are usually a part of the sale. Book accounts 
may also be sold outright to any one who wishes to 
make the purchase and who will take the responsibility 
of collecting debts. 

The book account is perhaps the oldest of credit 
instruments. Some primitive peoples kept records of 
things loaned. We have already seen how the family 



CREDIT INSTRUMENTS 23 

ledger was used in ancient Rome to record credit 
relations and these credit transactions which were re- 
corded in the register were legally binding. 
Book accounts are kept as customary the only J^^®^ 
evidence of debt by professional men as counts, 
lawyers, doctors, etc., and by manufacturers, 
builders, contractors, etc. These accounts have a legal 
status and are salable. 

A modern use^ of the book account in banking trans- 
actions in lending on open book accounts has developed 
in recent years as a result of changes in trade 
organization. When the commission mer- ^ ^^^ 
chant was a powerful factor in trade he loans, 
performed the function of banker as well as 
merchant in that he often advanced funds to the mill 
owner, to the planter or to both of them. Since his 
disappearance, there has arisen a banker who now con- 
ducts the financial part of the commission merchant's 
business in advancing funds to reliable traders or manu- 
facturers on open book accounts. The trader who has 
borrowed from his banker all that his means and credit 
standing will permit sometimes finds himself handicapped 
in trade when he cannot pay cash for the goods he buys. 
This new type of banker requests such a person to furnish 
him the names of the firms from whom he wishes to buy. 
When their ratings are found to be satisfactory, an in- 
demnity bond is secured covering the goods in question. 
The invoice of the seller must contain a notice that pay- 
ment for the goods should be made to the banker. When 

* The Journal of Accountancy, Feb., 1912, pp. 127-132. 



24 MERCANTILE CREDIT 

a notice is received to the effect that an order for the 
goods has been filled the shipper is sent an amount not 
exceeding 80 per cent, of the value of the goods, and this is 
charged to the account of the purchaser. When pay- 
ment is received the banking concern deducts the inter- 
est on the amount advanced, charges a fee for its services, 
and pays the seller the amount still due him. A method 
similar to this is sometimes used in advancing funds to 
importers of foreign goods. 

"A share of stock is a certificate of ownership in a 

corporation."^ The stockholders are the owners of the 

property of the company. However, a credit 

Stock relation exists between the stockholders and 

certifi- . . 

cates. their corporation. In purchasing stock the 

stockholders exchange funds for stock cer- 
tificates, which are credit instruments that indicate the 
number of shares of the company to which the holder is 
entitled. While the stock certificates themselves are 
not negotiable, for all practical purposes they are. The 
registered holder of them may sell them and deliver 
them to the buyer with his assignment in blank, and in 
this way they may pass through a great many hands 
without any registration on the books of the corpora- 
tion. Stocks are used extensively as collateral for bank 
loans, and the more fully negotiable they are the better 
they are for this purpose; consequently the tendency is 
to make them more easily transferable. . 

The two main classes of stocks are the preferred and 
the common shares. The preferred stockholders are 

1 Meade: Trust Finance, p. 150. 



CREDIT INSTRUMENTS 25 

given a preferred claim to the profits of the company 
and in event of dissolution of the corporation they are 
usually given a preferred claim to the assets preferred 
of the company. The preferred stockholders and corn- 
are usually paid an assured dividend which ^^^ 
must be paid before the common stockholders 
receive any dividends at all. The common stockholders, 
upon the other hand, frequently have the exclusive man- 
agement of the business of the corporation, and while 
they receive what is left of the profits of the company 
after the preferred stockholders and in some cases the 
bondholders are paid, if the business is a very successful 
one they receive comparatively large profits. 

The leading stock investments are in public service 
corporations and in industrial companies. As corporate 
organization in these enterprises has increased vastly 
the last fifty years property in the various classes of 
stocks has also increased to vast proportions. 

What is said of the increase of stocks as credit instru- 
ments may also be said of bonds in industrial and public 

service securities. However, bonds are more „ , 

Bonds, 
extensive than stocks, as they include also 

loans to governments, national, state, and local. Like 
the stock certificate the bond is ordinarily negotiable 
and as it too is used as collateral to secure loans there 
is every reason to facilitate its negotiability. A bond 
is a promissory note in which a government, a corpora- 
tion, or in exceptional cases, an individual promises to 
pay a certain sum of money. A bond differs from an 
ordinary promissory note in that ''it is issued as a part 



26 MERCANTILE CREDIT 

of a series of like tenor and amount, and in most cases 
under a common security."^ The security for a bond, 
like that of a note, may be found written upon the face 
or back of the bond itself/' ^ 

Corporate bonds are different from corporate stocks 

as the bond holder is a lender to the corporation who is 

promised a definite sum of money at a speci- 

- J fied time at a certain rate of interest and ordi- 
Donas. 

narily he has nothing to do with the manage- 
ment of the company. The bondholder usually has some 
kind of property pledged to the payment of the note while 
there is no pledge of property to pay the holder of stock. 
The different kinds of bonds, classified with respect 
to their security, are numerous, including such as real 

estate bonds, general mortgage bonds, blanket 

- -^ ^ mortgage bonds, equipment bonds, debenture 

bonds, etc. The name of the bond indicates 
the character of the security offered, but it is not within 
the province of this treatise to go farther into the sub- 
ject of the security offered. 

Of the credit instruments which are orders to pay, 
the check has come to be the most important in the 

^, , United States. It is an instrument authoriz- 

Checks. 

ing the transfer of funds which are credited 

to the maker of the instrument. It is a written order 

by an individual who has a deposit in a bank upon the 

banking institution to pay a certain sum of money. 

Checks are sight bills on bankers. The check when pay- 

1 Cleveland: Funds and Their Uses, p. 169. 
* Cleveland: Funds and Their Uses, p. 169. 



CREDIT INSTRUMENTS 27 

able to bearer or to order is a negotiable instrument and 
the individual who receives it, upon endorsing it, may 
transfer it to some one else in payment of an obligation. 
The check may circulate very freely in the business com- 
munity, and it may cancel many obligations the same 
as money can. It is used in the payment of obligations 
both locally and at a distance, and to the extent that 
it is used, it dispenses with the need of money. 

Records from Babylonian history^ show the existence 
of deposit banking in Babylonia. At first depositors 
left their money with large money lenders for jj^^ ^^ 
which they accepted receipts. Against these checks in 
funds depositors wrote checks ordering the ^^^y 
bankers to pay money to creditors of *°^^^* 
depositors. We see that the beginning of the check 
system thus dates back to early Babylonian history. 
The deposit system was established in Sicily in the 
fourteenth century and depositors were given the 
privilege of ordering by check payment of sums of 
money to others. 

In the United States and Great Britain the greater 
share of cash payments are made by checks. In other 
commercial countries the tendency to pay 
large sums of money by checks rather than ^f ® ^ 
by cash is rapidly increasing. Bills and notes present, 
are used for time transactions while checks are 
used for cash payments. The latter are superior to bills 
as they may be used in making payments promptly and 
consequently afford a faster method of doing business. 

^ Aldrich : Money and Credit, p. 72. 



28 MERCANTILE CREDIT 

Checks are usually presented, not where the deposit is, 
but in the holder's bank, and a completely developed 
clearing house system enables the banks in a commer- 
cial community to settle their claims against each other 
without delay. 

Closely associated with the common check are the 

certified check, the cashier's check, the cheque bank 

check, the letter of credit, the traveler's check 

checks ^^^ ^^^ post-office money order. They are all 

practically orders to pay funds which the 

drawer has deposited, or to which he is entitled. 

It sometimes happens that a depositor will desire to 
make payments where he is not known and where the 
payee does not care to take chances on a private check. 
Two devices are open to him: (1) He may draw his check 
for the amount desired, have the cashier of the bank 
where his deposits are write above his signature across 
the face of the check "certified" or "good when properly 
endorsed." This certified check is acceptable to the 
payee because its payment is guaranteed b}^ the bank. 
(2) The second method is to exchange his check for the 
*' cashier's check" made payable to the person designated 
by the depositor. 

An institution known as a "Cheque Bank" sells to 
its customers a book of its checks made up of assorted 
blanks, and across the face of each is written 
cheque *^^ maximum amount for which each may be 
bank. drawn. The buyer pays the sum of the 

amounts written on each check and when the 
book is returned, the bank refunds the difference between 



CREDIT INSTRUMENTS 29 

the amount paid for the cheque book and the amounts 
paid out. The purpose of the cheque bank is to make its 
checks more acceptable than the common check. 

A similar method of transferring funds also for the 
benefit primarily of travelers is the travelers^ check 
issued by express companies. The best 

Til A 

known of these are the American Express / , . 

traveler s 
Company's checks. The purchaser secures check. 

from an office of the American Express 

Company a number of checks of various denominations 

to suit the convenience of the traveler. They are bound 

together so that they may be carried conveniently and, 

as the agents who are authorized to pay these checks 

are widely distributed, the holder of these checks finds 

them very convenient as he can have them redeemed 

by banks, hotels, business houses, etc. 

The letter of credit is intended primarily for the 

convenience of those who travel in a foreign country to 

enable them to collect funds where they are 

unknown. The purchaser of the letter of ® ^" ° 

credit secures the right to draw sums of money 

at different times not to exceed the face value of the letter, 

while the letter of credit is a guaranteed account by the 

bank issuing it. When funds are drawn where the letter 

of credit is presented, the bank official writes down the 

amount drawn on the letter and he requires the customer 

to write his name and this signature is compared with the 

signature of the holder at the time the letter of credit was 

purchased. Letters of credit are of great convenience to 

the traveling public as advancements may be secured 



30 MERCANTILE CREDIT 

nearly everywhere and no identification is necessary aside 
from the comparison of signatures. 

The post-office money order is an instrument widely 

used in America for transferring funds. It performs 

practically the same function in transferring 

Post office jj^Qj^gy as checks and banks drafts. One who 

money 

order. desires money sent to some one at a distance 

may go to the nearest post-office station, pur- 
chase a money order for the amount desired, which is 
made payable to the person specified. It is then sent by 
mail to the payee who presents it at his post office and 
receives the amount designated. 

A bank draft is a bank's check upon any banking in- 
stitution in which it has a deposit or credit relations 

to pay a certain sum of money. It is an 

- ^^ instrument used by a bank to draw funds from 

draft. ... 

another bank in which it has deposits the same 

as a check is an instrument by which a depositor draws 

funds from a bank where he has deposited money. The 

person receiving the draft, the payee, may upon endorsing 

it sell it to some one else and it may serve as a medium 

of exchange, passing through a great many hands. The 

bank draft is used to pay debts at a distance, to transfer 

money to remote sections of a country or to a foreign 

country, and also to facilitate travel by transferring 

money with but little risk to places where it is made 

available. 

The bank draft was the earliest Bill of Exchange. 

Bank drafts were dealt in extensively in Greek and 

Roman times. The money changers or bankers had 



CREDIT INSTRUMENTS 31 

branches or agents in distant cities and foreign countries 
upon whom they drew for the payment of money. By 
selling drafts they enabled merchants to pay debts in- 
curred in purchasing merchandise at a distance. In 
selling drafts to travelers they enabled the latter to go to 
distant countries, obtain the money of the country and 
travel with ease. 

A bill of exchange or commercial draft is an order or 
request by one person upon another to pay a certain 
sum of money. The payee may be the drawer 
of the bill or some one that the drawer owes. chanee 
In either case the amount paid is charged to 
the account of the drawer. The occasion which gives 
rise to a commercial draft is usually a sale of goods. 
The seller of merchandise makes out an order against the 
purchaser to pay the purchase price of the goods either 
to himself or to some one else who is to collect the bill. 
The bill may be made out payable at sight or after sight. 
The former is known as a sight draft. If the seller of 
the merchandise desires to give credit to the purchaser 
for a few months, the bill of exchange is made out pay- 
able after the lapse of the credit period. The bill may 
be accepted by the purchaser of the goods writing across 
the face of the instrument "accepted'' with the date of 
acceptance and signing it. 

The bill may then be sold to a banking institution 
or any one else who will make the purchase and both 
the drawer and drawee become responsible for its pay- 
ment. As a salable instrument it is double-name paper. 
Its acceptance makes it a written evidence of debt the 



32 MERCANTILE CREDIT 

same as a promissory note. Without being accepted a 
bill is not a credit instrument. It is simply a request 
of one person upon another to pay a sum of money. 
However, bills not accepted are frequently sold as re- 
sponsibility for them rests with the drawer. 

In England^ a distinction is made between a bill of 
exchange and a draft. Only bills that are "accepted'' 
are drafts. All others are bills of exchange. Bills of 
exchange often mean foreign bills, while acceptances 
are domestic or inland bills. However, bills of exchange 
are ordinarily included to cover both "accepted" bills 
and those not accepted and foreign bills and domestic 
or inland bills. 

The commercial draft grew out of the Great Mediaeval 
Fairs of Europe which were centers for the distribution 
of products. After the period of direct barter, money 
changers attended the fairs to exchange money for the 
traders. With the great multiplication of goods to be 
exchanged and a better organization of the mercantile 
system, merchants remained at home, shipped their 
goods to each other, and by means of bills of exchange 
they secured payment for their goods with the use of 
but little money. 

Bills of exchange have reached the greatest degree of 
acceptability in England. Where in America 

F.ff °l "fctie promissory note is generally used pledg- 
biUs of , . - , 

exchange. ^^S ttie promise of the purchaser to the pay- 
ment for a bill of goods sold on time, in 
England the commercial draft is used. Often to these 
1 Journal of Accountancy, Dec, 1911, p. 601. 



CREDIT INSTRUMENTS 33 

drafts bills of lading are attached representing the prop- 
erty shipped, which is a pledge to the payment of the 
bill. As each succeeding endorser is pledged to pay the 
face of the bill they may pass through many hands and 
are considered relatively safe instruments of credit. 

The bill of exchange is also used in what is termed 
accommodation paper. A may order B to pay a certain 
sum of money and when B accepts it, A may sell it to a 
banking institution. B in turn orders A to pay a cer- 
tain sum of money and as soon as A accepts it, B can 
dispose of it to a banking institution. This is known 
as accommodation paper. Other forms of bills of ex- 
change are not subjects for discussion here. The two 
sorts of transactions, however, represent the purposes 
for which bills of exchange are made out. 

Aside from the promises to pay and the orders to pay 
other credit instruments are bills of lading and warehouse 
receipts. 

The bill of lading is an itemized statement of goods 
shipped, and it gives the purchaser or the one to whom 
the goods are shipped, a right to them. The 
bill of lading is both a receipt and a contract. . * .. ° 
It is a receipt given by the transportation 
company acknowledging the acceptance of goods and it 
is also a contract between the transportation company 
and the shipper stipulating the terms and manner of 
shipment and the carrier^s responsibiUty. As the bill 
of lading is a right to certain specified goods, it is a sale- 
able credit instrument and may be transferred frequently, 
and as often as it is sold, the goods called for by the bill 



34 MERCANTILE CREDIT 

of lading change hands. As it is a favorite collateral for 
loans from banks, it is not only used to facilitate the sale 
of goods but as a basis of credit pending their sale. 

The bill of lading is often an instrument used in the 
collection of accounts. In shipping a bill of goods the 
seller often attaches a commercial draft to the bill of 
lading with the understanding that the latter is to be 
delivered, together with the right to the goods only 
when the draft is paid. 

The bill of lading is used as collateral to secure the 

advancement of funds especially in cases of standardized 

products such as wheat, cotton, coffee, etc. 

V^^f .?, . Local buyers of grain are without much cap- 

the bill of . , _ - . , . 

lading. ^^^^ ^^^ ^^ ^^ ^^ extensive busmess they must 

secure advancements of funds from commis- 
sion men who buy from them, or from their local banks. 
A favored way of securing advancements when grain is 
shipped, is to attach to a bill of lading a draft written 
against the commission man and deposit them with the 
local banker who will advance funds which are used in 
buying more grain. When grain is again shipped from 
the interior market to the seaboard, the shipper secures 
a bill of lading from the vessel or railway company, 
draws a draft against the consignee and deposits the 
draft and bill of lading with the bank and has funds 
advanced. The cycle of transactions of this class is 
completed when the exporter draws a draft against the 
foreign purchaser and attaches to it the steamship bill 
of lading and the insurance policy on the cargo and takes 
them to his banker and sells the bill. 



CREDIT INSTRUMENTS 35 

The warehouse receipt performs practically the same 
function as an instrument of exchange and as a credit 
instrument to secure the advancement of 
funds, as the bill of lading. It is a receipt ware- 
for goods classified and placed in a ware- receipt, 
house. The purchaser of many classes of 
farm products exchanges funds for a warehouse receipt 
which entitles him to the possession of the goods depos- 
ited. Goods are sold through a disposition of the ware- 
house receipt. When sold the warehouse receipt must 
be endorsed the same as a promissory note, check, or 
other instrument of credit. It is also used frequently 
as collateral for the advancement of funds. With the 
increased tendency to classify and to standardize ware- 
house products, it becomes to a greater extent both a 
negotiable instrument and collateral for the advance- 
ment of funds. 

Contracts for the delivery of grain are usually ful- 
filled by a tender of warehouse receipts.^ ''The receipt 
states the name of the elevator company issuing it, the 
date of issue, the kind and amount of grain, and the name 
of the owner." When sold the receipts are endorsed. 

Terminal elevator companies buy large quantities of 

grains and to carry on their buying operations 

they are heavy borrowers of banks. To pro- , 

1 . % warehouse 
cure loans elevator receipts are deposited as receipts. 

collateral. They are considered safe collat- 
eral and where the market is stable bankers advance 

* "American Produce Markets/' Annals of American Academy 
of Political and Social Science, p. 39. 



36 MERCANTILE CREDIT 

funds to 90 per cent, of the value of the receipts. When 
the grain is sold the loans are paid and the receipts are 
surrendered. All others engaged in purchasing grain 
secure the advancement of funds from banks by de- 
positing warehouse receipts with them. 



CHAPTER III 
KINDS OF CREDIT 

Depending upon the basis of classification credit 
may be classified in a variety of ways, and each class 
may be divided into many sub-heads. We may group 
all classes of credit under two main heads, 
public and private credit. From the point ^^^^ 
of view of the use of funds credit may be ^jq^^ 
divided into productive and consumptive 
credit and to these may be added a third, public credit, 
which is in part productive and in part consumptive 
credit. Upon the basis of the personality of the bor- 
rower credit may be divided into individual credit and 
corporate credit. In the above suggested classification 
each of the main divisions of credit may be divided into 
many subheads. 

Upon the basis of the conditions affecting credit, 
credit may be divided into five kinds :^ mercantile, per- 
sonal, banking, public and investment credit. This 
classification will be used in the present treatise. While 
no hard and fast lines can be established between different 
kinds of credit, it is believed that this classification 

1 Prendergast divides credit into the same five classes [Pren- 
dergast: Credit and Its Uses.] Galloway divides credit into four 
classes, Personal, Mercantile, Business and Banking Credit. [See 
Advertising, Selling and Credits in the "Modern Business Series."] 

37 



38 MERCANTILE CREDIT 

serves a useful end in describing the uses and purposes of 
credit. This chapter represents an attempt to describe 
the last three classes and to explain their relation to 
mercantile credit, while a discussion of personal and 
mercantile credit is reserved for subsequent chapters. 

Mercantile credit is the power to secure goods for 
purposes of sale in return for an equivalent promised in 
the future, and a mercantile credit transac- 
Mercan- ^j^^^ consists of an exchange of goods for a 
tUe credit. ^^^^.^^^ equivalent. A sale of goods on 
time is a mercantile loan. Wholesalers, jobbers, com- 
mission men and retailers deal in mercantile credit, as 
sellers are frequently compelled by business practice to 
give time for the payment of goods from the proceeds 
of their sale. 

Personal or individual credit is the power to secure 
something valuable in the present in exchange for some- 
thing promised in the future. It is some- 
Personal ^.j^gg known as consumptive credit, as 
*^'®^*' personal credit is obtained at present chiefly 
for purposes of consumption, but in this discussion 
personal credit not only includes consumptive credit 
but also the credit which enables individuals and partner- 
ships to secure capital for purposes of production. 

BANKING CREDIT 

Banking credit is the power of a banking institution 
to obtain something of value in the present in exchange 
for its promise to pay. In the case of a simple de- 



KINDS OF CREDIT 39 

posit the bank exchanges its promise to pay in the form 

of a certificate of deposit or a book credit for funds or 

a title to funds. Because the bank is required 

to pay money in the future, this transaction Baiuang 

is often termed a "short sale** of money. In defined. 

other instances which arise in the ordinary 

work of Commercial Banks, the bank exchanges its 

credit for the credit of persons or associations. 

The three primary functions of a bank are those of 
deposit, discount or loan, and note issue. The early 
bankers were money changers, who exchan- Bankine 
ged one form of money for another either do- functions 
mestic or foreign. Perhaps the next function i^ ^^^J 
assumed by banks after money changing, was ™®^' 
to pay a given amount to some one else in another 
place. ^ To do this work, it was necessary to have 
correspondents in other places on whom orders to pay 
were drawn. This function was assumed by bankers in 
Babylonia, Greece and Rome. The next step toward 
the modern banking system consisted in receiving de- 
posits for which receipts were given, the depositor being 
permitted to withdraw his funds upon presentation of 
his receipt. He was also permitted to order his banker 
to pay to a third person all or a part of the amount de- 
posited. This method of banking was prevalent in 
Babylonia as well as in the mediaeval states of Europe. 
A transfer of funds from the credit of one person to an- 
other on the books of the bank was permitted by the 
leading banking institutions of mediaeval Europe. At 

* Seligman: Principles of Economics, p. 525. 



40 MERCANTILE CREDIT 

first the transfer could be made only by word of mouth 

in the presence of both parties but later the transfers 
were made by written order or draft by the depositor 
upon the banking institution. 

The loaning of funds deposited with banks for pur- 
poses of safe keeping was at first considered incompatible 

with the proper custodial care of people's 
^f^m^d"^ funds. However, the functions of money 
banks. lending and deposit banking became common 

in Greece and Rome as well as in Mediaeval 
Europe. The bank of Amsterdam was perhaps the 
first to advance money upon deposits of coin or bullion, 
the latter to be given to the owner upon the return of 
the money advanced. By degrees advancements were 
made upon the deposit of other things, the funds or 
wealth deposited guaranteeing the return of money ad- 
vanced by the bank. As an outgrowth of this develop- 
ment we have to-day such specialized institutions as the 
agricultural and mortgage banks of Europe, and the 
bond and mortgage companies and other closely related 
institutions of the United States. The acceptance of 
collateral by commercial banks to guarantee the payment 
of loans is a modern safeguard corresponding to the 
advancement of money based upon deposits of bulHon 
of the mediaeval bank. 

The conditions under which banks lend do not come 
Founda- directly under the head of banking credit, or 
tions of the power of banks to secure advances of 
banking funds in exchange for their promises to pay. 
^^^ ^** But as the power of banks to command the 



KINDS OF CREDIT 41 

confidence of the business community, and also the 

funds of the community, depends almost entirely upon 

the caution and judgment of banks in lending their 

funds, it seems appropriate to consider the conditions 

under which banks lend their credit. 

As contrasted with the earlier banking institutions, 

credit creation is the distinctive feature of the modern 

banks. The bank loans not alone its money 

but its credit. In the regular routine of bank- 

° creation. 

ing in the great majority of cases when a loan 
is made, cash is not paid out to the borrower, but he is 
given a credit account on the books of the bank. Like- 
wise, when the loan is paid, the banker simply charges 
the amount against the borrower's account. In our 
modern methods of business but little cash is used, the 
great bulk of payments being made in checks or drafts 
against an account in a bank. Because of this, when 
business men borrow from a bank they do not want cash 
but a deposit account which they can draw on by checks 
when they make their payments. Business men thus 
leave nearly all their funds with banks because it is to 
their interest to do so. Since banks enjoy the con- 
fidence of the business community to such an extent as 
to retain as deposits in large measure the funds loaned 
as well as other deposits left with the bank, it can loan 
to a far greater extent than its capital and deposits com- 
bined. It is by this method of credit creation that the 
bank earns its chief income and performs its greatest 
social service. Experience shows that not all who have 
claims against a bank will present them at once, and that 



42 MERCANTILE CREDIT 

in ordinary times, a bank needs to keep but one-fourth 
or one-fifth of its obligations in its vaults for redemption 
purposes. This means that by use of its credit with a 
given amount of funds a bank can lend several times as 
much as any individual. 

Mercantile credit and banking credit are mutually 
dependent. Mercantile credit transactions give rise to 
. the great bulk of banking credit and banking 

between credit supports and makes possible mercan- 
mercantile tile credit. When goods are sold by manu- 
andbank- facturers, jobbers or other middlemen on 
"^^ ^'® * thirty, sixty, or ninety days time, the seller 
usually accepts a promissory note from the buyer as a 
pledge of payment, or, as is the usual case in the British 
Isles, he writes a bill or draft ordering payment which the 
buyer accepts. These notes or drafts are taken to the 
commercial bank and discounted. In other words, 
these promises to pay, the evidences of the mercantile 
loan, are sold to the commercial bank, the latter advanc- 
ing the funds, or in other words, making a loan to middle 
men to cover the value of the goods sold. The loan 
function of the bank is ordinarily called the "discount 
function" as the great majority of its loans are made by 
discounting notes, drafts, or other paper which come into 
being in the ordinary course of business of which the 
above is typical. It is obvious that the mercantile loan 
gives rise to a large volume of banking loans. However, 
if it were not for bank loans, mercantile loans would be 
greatly restricted. Time is given frequently by the 
manufacturer, jobber, etc., because they know that 



KINDS OF CREDIT 43 

they can take the notes of the buyer to the commercial 
bank and have them discounted. The great majority 
of mercantile houses have not an adequate supply of 
capital to carry on an extensive loan business wthout 
the aid of banking institutions, and it was for the pur- 
pose of rendering this and similar functions that the 
modern commercial bank was developed. Mercantile 
credit is thus fostered and supported by banking credit. 

When the merchant sells to a bank the promissory note 
of the purchaser of his goods endorsed by himself, the 
banker subtracts from the face of the note the interest 
for the time the note is to run, and either gives the 
merchant the present value of the note in money, or 
gives him credit for the amount on the books of the 
bank. Where money is paid, the bank exchanges a 
present value for the promise to pay in the future. This 
transaction involves banking credit only in the sense 
that the bank is a giver of credit. In the other case, 
where the merchant is given credit on the books of the 
bank for the amount due him, banking credit is ex- 
changed for mercantile credit. The bank exchanges its 
promise to pay for the credit instrument which the pur- 
chaser of goods gave to the seller. 

Individual or personal credit is related to banking 
credit in a similar way. Individuals who en- 
joy a good credit reputation may borrow ©f banking 
money from a bank. If the bank pays the credit to 
money directly to the borrower in exchange personal 
for his promissory note, banking credit is in- 
volved in the transaction only in the sense that the bank is 



44 MERCANTILE CREDIT 

a giver of credit. Upon the other hand, if the borrower 

of the money leaves it on deposit in the bank, which is 

the usual case, then the bank exchanges its promise to 

pay for the promise to pay of the borrower, in which 

case banking credit is exchanged for personal credit. 

In some respects banking credit is the highest form 

of credit, for the standards set by banking institutions 

are, and should be, above those of any other 

Banking individual or institution giving credit. In 

credit sets 

standards. ^^^ ^^^ nature of things, a bank should 

enjoy the fullest confidence of the public. 
If it does not, its service is at an end. As it has custodial 
care of the funds of the community, the people desire to 
be certain of getting their money when they want it, or 
when the obligation of the bank to pay them, matures. 
When a merchant buys a bill of goods on sixty days' time, 
if he is imable to pay the note when due he may ask for 
an extension of time, which the seller may be willing to 
grant or be compelled to grant for practical reasons. 
In personal credit too, borrowers may be unable to pay 
notes when due and their requests for an extension of 
time are frequently granted. But a banking institution 
cannot ask for extensions of credit; it must meet its 
obligations as they mature or close its doors and admit 
its failure as an institution of credit. 

Since a bank makes its chief income by loaning its 
credit, and as its loans are usually several times in excess 
of the funds in the bank to redeem them, and further- 
more, as it must close its doors the moment it confesses 
its inability to meet its obligations, it is imperative that 



KINDS OF CREDIT 45 

it should exercise the greatest caution in lending. It 

is limited to short-time loans, that is, call loans, and 

loans for thirty, sixty, and ninety days. Where loans are 

made to persons, most banks limit their purchases to 

''double name'' and ^'triple name'* paper. When 

''single name" paper is purchased, the borrower must be a 

man of ready means who is certain to have funds ready as 

his note matures. Where a loan is based on a sale of 

goods, the paper purchased is almost invariably "double 

name'' paper, as the purchaser gives his note to the 

seller and the latter, before selling it to a bank, must 

endorse it. 

Accommodation paper is also "double name" paper. 

In this case would-be borrowers exchange their notes 

or bills, take them to their respective banks, 

afiix their own signatures, and banks buy Accom- 

t( . modation 

them as double name paper. Much has paper. 

been said of the inferiority of such loans as 

contrasted with those based upon a sale of goods. While 

the latter class of loans is superior to the former, its 

superiority has been greatly exaggerated. Since the 

sale of goods gave rise to the loan, and although the 

maker of the note is supposed to pay it from the sale 

of the goods, and often does so, no property is pledged 

for the payment of the note and, as will hereafter be 

shown, several notes are often written based upon the 

sale of one lot of goods. Loans made for consumption 

purposes, as is often the case, clothe the borrower with 

no power whatever to pay them when due. In either 

case, however, much depends upon the ability of the bor- 



46 MERCANTILE CREDIT 

rowers to pay their debts and upon the habits of the 
borrowers in debt payment. 

Often the deposit of collateral consisting of shares of 

stock or bonds is required as a pledge of payment of 

notes. The safest collateral accepted is 

*uT °^ ^^^^ which is quoted on the Exchange as it 

may be sold at once and the loans paid. 
Commercial banks often have regular credit depart- 
ments to pass judgment on the value of titles to prop- 
erty submitted as pledges to loans, and also 
Credit ^Q p^gg judgment on the worthiness of bor- 

ments. rowers. Business houses are often granted 
lines of credit which permit them to borrow 
from the bank up to a certain limit. These lines of 
credit are granted after a thorough investigation of the 
credit standing of houses seeking credit. 

The interest charged by banks is relatively low, as the 

terms are for short periods and as great caution is 

exercised to avoid risks. This means also 

that banks give very low rates for the money 

they borrow. 



Interest 
rates. 



PUBLIC CREDIT 

Public credit has no immediate relation to mercantile 

credit, and only a brief consideration will be 

^^^}}^ , given to it. It is the power of government — 
credit de- . ,..,,... 

scribed. national, state, or lesser political division — 

to secure funds in exchange for its promise 

to pay in the future. Its chief instrument of credit is a 



KINDS OF CREDIT 47 

government bond, which is a promissory note of the gov- 
ernment sold to purchasers; or, in other words, it is ex- 
changed by the government for funds advanced by indi- 
viduals. In some instances a special class of property, or 
the income from specified property, is pledged to pay the 
loan, while in other cases the lender depends exclusively 
on the faith of the government to pay the obligation. 
These loans are the typical long-time loans, and the 
interest rates are low where the governments are 
stable. Where governments are insecure, the interest 
rates are higher, varying with the insecurity of the 
government. 

Another type of the public debt is the floating loan, 
which is frequently a forced loan. In time of war, when 
armies are in the field, it is often necessary to 
secure loans of provisions and equipment from . °^ *°^ 
the section of the country over which the army 
passes. Certificates of indebtedness are issued by army 
officials which are exchanged for these things, and are 
usually redeemed at the close of the war. 

At times governments resort to their promissory notes, 
or government paper money, which are given general cir- 
culation when governments pay their obliga- 
tions. These are convertible or inconvertible, ^^^^ 

' money. 

depending on whether the government pledges 
anything to redeem them or not. Lesser political divi- 
sions are usually denied the privilege of paying their 
debts by issuing paper money. The propriety of resort- 
ing to this method of borrowing by governments is not a 
subject for consideration here. 



/ ---^ 



48 MERCANTILE CREDIT 

The chief causes of public debts are war expenditures, 
and public improvements. Until recently governments 

borrowed chiefly to defray the expenses of war. 
Causes of -js^^^ these are declining in importance in 
debts. comparison with expenditures for industrial 

improvements and other public improvements 
of a constructive character. 



INVESTMENT CREDIT 

The fourth division, investment credit, or capital 
credit, as it is sometimes called, is represented by real 
What in- estate investments consisting of bonds and 
vestment mortgages, bonds and shares in public service 
credit in- utilities, bonds and shares in general industrial 
^ " ®^* securities, and shares in banking and in trust 
companies. Investment or capital credit is a long-time 
loan. In investment credit, the corporation or business 
receives funds from individual investors in exchange for a 
title to property. The term investment credit expresses 
the point of view of the lender, as loans are made purely 
for purposes of investment. An investigation of invest- 
ment credit would take us into the entire field of the 
money market and of speculation, but our purpose is 
simply to state what it is, explain its nature and its 
relation to mercantile credit. 

Until a few decades ago, capital was invested in 
business enterprises by those who assumed directly the 
management of business with the hope of making good 
profits on their successful management. Since then, 



KINDS OF CREDIT 49 

with the development of corporations, and especially 

those on a large scale, a great deal of the capital invested 

in business is contributed by those who are „ . 

. . Business 

not active participants m business, but who organiza- 

advance the capital with the hope of making tion and 

only fair profits. This so-called general in- investment 

i ' ' ... , ^ ,, credit, 

vestor is increasing m importance now, and by 

all odds the largest portion of capital is invested by men 
of this class. In the single entrepreneur system large- 
scale production with its advantages was impossible. 
With the partnership organization, the business unit could 
command a larger amount of capital, but disadvantages 
of the partnership organization prevented it from becom- 
ing the prevaiUng form of organization for large undertak- 
ings. The corporation became the most advantageous 
institution for large units of production. ^ It could attract 
capital from a great variety of investors because (1) they 
are not responsible for the obligations of the corporation 
beyond the amount of their subscribed stock, (2) they can 
buy shares in small amounts, and (3) they can withdraw 
from the corporation at any time by selling their stock at 
its market value. Moreover, the corporation has an 
advantage from the point of view of organization, as 
it is relatively stable and permanent and it can concen- 
trate its executive management in a few very competent 
men. 

The railroad business in the United States which rep- 
resented the first great demand for large scale production 
and consequently for the corporation form of organiza- 

* See Ely: Outlines of Economics^ p. 148. 



50 MERCANTILE CREDIT 

tion, finds the corporation in almost exclusive control 
to-day. Corporations produce nearly three-fourths the 
Extent of ^^^^^ product in manufacturing industry and 
invest- an increasing number of mercantile establish- 
ment ments are corporations. Nearly all banks, 
credit. • ^ , . 

msurance and trust companies are corpora- 
tions. Nearly all municipal utilities under private con- 
trol, are also corporations. 

The property of corporations is in the form of stocks 
and bonds. Bonds give their holders a preferred claim 

to the assets of the company and the interest 
Stocks 

.- , on them must be paid regularly. There are 

several kinds of bonds depending upon the 
character of the guarantee of the funds loaned. The 
stock is divided into common and preferred shares, 
although many corporations do not issue the latter. 
The preferred stock when issued has usually a prior claim 
over the common both to assets of the business and to 
earnings, and in such cases dividends cannot be declared 
until the holders of preferred stock are paid their interest 
in full. A further discussion of the investments in cor- 
porations is not warranted by the limits of the present 
chapter. 

From the point of view of the investor, investment 
credit and public credit are identical. Both are long 
Invest- ^^^^ loans and upon each is realized usually 
ment and a low rate of interest. Both appeal to practi- 
public cally the same class of investors. But from 

^'® ^ * the standpoint of the agency enjoying the 

credit the two kinds are different. In public credit the 



KINDS OF CREDIT 51 

lender buys bonds when he believes that the government 
is willing to pay, and has resources sufficient to enable 
it to pay its obligations. In capital credit the investor 
buys bonds or stocks when he believes that the business 
is sufficiently profitable to enable it to pay its debts. 
Because the securities of many kinds of capital credit 
fluctuate in value, many investors are attracted to this 
class of property by the hope of its appreciation in 
value. 

Mercantile credit is radically different from invest- 
ment credit. As the former is a short-time loan, the rate 

of interest is usually high, the loan is made , 

Invest- 
not as an investment but because the sale of j^^^^ ^nd 

goods upon which the profits of the merchant mercan- 
are made, requires the loan. Upon the other *^^® , 
hand, the power to command credit by insti- 
tutions in investment credit and in mercantile credit 
arises from a very different set of forces. 

Ordinarily investments in real estate mortgages are 
the safest long-time loans of investment credit. The 

investments of building and loan associations „. , , 

Kinds of 
are in this class of property, and as the loans invest- 

are for considerably less than the value of the ment 
property, they are considered safe. The secu- credit 
rities in banks, trust companies, and insurance 
companies are considered a safe investment, but of 
course here much depends upon the character of the in- 
stitution. Of the investments in public service utilities, 
those in railway stocks and bonds are perhaps now the 
safest. However, in the early history of railway develop- 



52 MERCANTILE CREDIT 

ment in this country these were considered an unsafe in- 
vestment. The investments in municipal utiHties such as 
the securities of street railways, telephone, waterworks, 
gas and electric lighting companies are more or less pre- 
carious, as it is difficult to find out the values of the prop- 
erty of the companies, the capacity of the companies to 
carry on a successful business, and ultimately the abihty 
of the companies to pay at maturity. Stocks and bonds 
in these companies fluctuate frequently, and individuals 
who make such loans take chances. More uncertain 
than loans to public service companies are loans to 
general industrial enterprises. The status of the com- 
panies engaged in industrial enterprises is difficult to 
discover, and on that account this sort of investment or 
loan is more precarious. The so-called industrial secu- 
rities as investments have arisen to importance in recent 
years, as may be seen from the fact that nearly one-half 
the property Usted on the New York Stock Exchange 
is of this character. 

The funds to carry on the above-named enterprises 
come from a variety of sources, and each sort of an in- 
vestment has its respective interests. Those who are 
required to make safe investments at low rates will seek 
of course the safer investments. There is an opportun- 
ity, however, in investment credit for people of varying 
grades of speculating instincts. The chief support of 
these investments is coming now from business men who 
have funds to invest and do not care to manage business 
directly themselves. Such investors canvass the money 
market carefully, and distribute their investments in 



MERCANTILE CREDIT 53 

such a way as to yield a fair profit without taking too 
great a risk. These investors expect a lower rate of 
interest than when they manage a business themselves 
in which they have invested all of their wealth and lose 
all they have in event of failure. 



CHAPTER IV 

MERCANTILE CREDIT 

Mercantile credit is the power to secure goods for 
purposes of exchange in return for a valuable considera- 
tion promised in the future. A sale of goods 
Definition ^^ ^^^^ -g ^ mercantile loan. Mercantile 
of mercan- 
tile credit, credit includes the credit given to faciUtate 

the distribution of products from the time 
they are in a raw state until they pass into the possession 
of the retailer. In this discussion the selling of goods 
on time by the retailer is not considered a mercantile 
loan as the goods in this instance are usually purchased 
for purposes of consumption, and the credit given is not 
for the purpose of facilitating the transfer of goods. 
However, this personal or consumption credit is closely 
related to mercantile credit as the soundness of the latter 
depends in large measure upon care exercised in giving 
personal or consumption credit. 

From production to consumption goods pass through 
the following hands: the grower or original producer, 

the selling agent or broker, the manufacturer, 

Classes of ^^le wholesaler, the jobber, and the retailer. 

middle 

men. When goods are imported the importer is a 

distributer between the manufacturer and 

wholesaler. Of course the great bulk of merchandise is 

not now handled by all these middle men. However, 

54 



MERCANTILE CREDIT 55 

some products even now are handled by all of them and 
of those that are not handled by all these middle men, 
some are handled by some of them and others by other 
middle men. The tendency now in reducing the cost of 
marketing goods is to eliminate classes of middle men 
with the result that the amount of credit given to 
market goods is lessened. 

The grower or producer of raw materials is frequently 
compelled to resort to a loan to cover the period inter- 
vening between the production of goods and -^^^ ^^^ 
the time they are sold or when pay is received ceive mer- 
for them. In the sale of such products as cantile 
grain, cotton, etc., credit is given as a rule and 
both the farmer and the commission man receive ad- 
vances before funds are received from the sale of goods. 
The manufacturer may buy his raw material on time 
in which case he receives a mercantile loan. Again after 
his goods are manufactured it may be necessary for him 
to wait a limited period after they are sold before he re- 
ceives pay for them. The importers, the wholesalers, 
the jobbers, the commission merchants, each in turn 
often buy goods on time thus receiving mercantile loans. 

Merchandise in the hands of the manufacturer or the 
mercantile factors is capital, and when it is 
parted with for a promise to pay funds in . 

the future, capital has been loaned in as true mercan- 
a sense as when funds pass over the counters til® "pon 
of a bank in exchange for the promise to ^^a-^^ 
pay in the future. The commercial world 
is so organized that the majority of the distribut- 



56 MERCANTILE CREDIT 

ing factors require the advancement of funds to help 
bear the expenses of handling and marketing goods, and 
to cover the time until payment is received for goods 
sold. The manufacturer sells goods to the wholesaler 
on thirty, sixty, or ninety days time, and accepts the 
note of the latter for the amount of the sale or writes 
a bill against him. This instrument is then frequently 
taken to the manufacturer's banker and is discounted. 
The wholesaler may sell to the retailer under the above- 
named conditions, and may also have his banker dis- 
count the instrument of credit. In each of the above 
instances banking institutions are called upon to advance 
funds to support mercantile loans, and at these points 
banking credit supplements and supports mercantile 
credit. 

The most important change introduced by the 
modern methods of buying and selling is the system 
Mercan- adopted by which credit is given. In the 
tile credit first half of the nineteenth century, in the 
sixty United States, when the jobbers and manu- 

years ago. f^^j^^j-^j-s were visited by retailers twice a 
year to purchase goods, they could understand through a 
personal acquaintance of the buyer the nature of the loan 
given. Then the jobbers and manufacturers were not 
doing business on so large a scale as now, the buyers were 
fewer in number and the sales were much less frequent. 
The buyers were compelled to travel long distances over 
inferior highways or by slow boats on rivers and canals, 
and as they purchased but twice a year they were com- 
pelled to buy large stocks of goods much of which was 



MERCANTILE CREDIT 57 

unsalable as it was difficult to anticipate a season's 
demands especially when the community was a change* 
able one. Goods were purchased on time, the buyer 
giving his note for the purchase which was paid in six or 
eight months when he returned for his next season's pur- 
chase. Long time credits were the custom then owing 
to the industrial conditions that could not be avoided 
which confronted the buyers. Then as now, manufact- 
urers and jobbers sold their customers' notes to their 
bankers. In foreign trade long terms of credit also pre- 
vailed in periods of slow vessels and of slow methods 
of communication between trading centers. 

The introduction and wide extension of the railway 
and the introduction of better means of communication 
by mail service, the telegraph, and telephone _ 

C&US6S of 

have revolutionized the methods of market- changes in 
ing goods and also the mercantile credit granting 
system. Whereas before the retailer had to i^®rcan- 
make long trips to the market and have his 
goods shipped at great hazard over rough roads, the bet- 
ter means of communication and transportation have 
reversed the situation as it is considered more advanta- 
geous to have the manufacturer and the jobber sell the 
buyer and bear the risks of conveying the goods to him. 
At present the instances are exceptional where the buyer 
and seller come together. Goods are sold by traveHng 
salesmen who visit the various buying localities, using 
samples to make their sales, or else they are purchased 
by the buyers through correspondence and not by visit- 
ing the houses of manufacturers and jobbers as formerly. 



58 MERCANTILE CREDIT 

The long term of credit of from six to twelve months 
has given way to the short time loan of from thirty to 
ninety days. Mercantile agencies have developed to 
make known the credit standing of the buyer to the seller 
and the latter no longer depends upon a personal inter- 
view with the former to judge of his credit standing. In 
the large jobbing and manufacturing institutions a de- 
partment has been developed whose special function is 
to investigate the standing and character of those seek- 
ing credit and to collect time accounts. In the smaller 
institutions not of sufficient size to warrant the estab- 
lishment of a separate department, this function is, 
nevertheless, carefully performed. 

Our present credit system grew out of distinctly 
modern conditions. Prior to the 19th century inability 

to pay a debt was frequently a criminal 
under offense and the offender was thrown in prison, 

which The state of Georgia was organized by a col- 

credit was ony of delinquent debtors who were given 
^^^^ their liberty if they would leave England. 

Virginia and other states were largely 
settled by indentured servants — those who became, in a 
sense, slaves to their creditors until the obligations of 
indebtedness were removed. The farther we go back in 
history the more rigid we find the laws against debtors. 
Inability to meet an obligation as it matured was con- 
sidered one of the gravest of offenses. The laws and 
practices of the early maritime cities of Italy, Venice 
and Genoa, bear evidence of the power of the creditor 
class. The Shylocks were not merciful. So long as 



MERCANTILE CREDIT 59 

these harsh measures prevailed the giving of credit re- 
quired but little judgment, and the development of a 
credit system was unnecessary. The risk was wholly 
the debtor^s of assuming the responsibility of meeting 
an obligation at a certain time. 

In our present industrial era the harsh treatment 
accorded to the debtors of two or three centuries ago 
would be absolutely impossible. Present _. 
conditions make the debtor and creditor in a . granting 
sense partners in enterprise. Credit is given / of credit 

not as a favor to the debtor but with a view j ** 

■■^ DrGscnt 
to profit. The old idea that the debtor owedT 

the creditor in law and in fact is passing away. The 
creditor investigates the character, ability, and financial 
standing of the debtor, the nature of the enterprise in 
which the capital is to be invested, and calculates on the 
likelihood of the debtor^s being able to meet his obliga- 
tions at maturity. He thus becomes, in a sense, his 
partner in the business and in event of failure willingly 
accepts a cancellation of a portion of the debt, providing 
that there has been no fraudulent conversion of the 
assets. 

The complicated organization of modern industry 
requires credit giving. Business could scarcely be carried 
on for a day without it. The element of chance seems 
to play a much more conspicuous role than when busi- 
ness organization was simple. The spirit of venture 
finds no more enticing field than in some departments 
of business. The success, too, of many of our great 
captains of industry may be traced to the taking of great 



60 MERCANTILE CREDIT 

risks. This element of risk is responsible to a large ex- 
tent for our industrial advancement. It is thus easy to 
see why credit giving should, in the nature of things, be 
considered a necessary part of business transactions and 
why the debtor who failed honestly should be considered 
simply an unfortunate investor. 

The rise of corporations which take the place of 
partnerships introduces another change which has its 

reflex influence on credits. As long as the 
Corpora- 
tions in- partnership remains family honor and family 

fluence pride count for much in avoiding the bank- 
the giving puptcy court. In corporations the identity 
and importance of the individual are not con- 
spicuous. '* Stockholders and managers of corporations 
frequently screen their credit and honor behind joint 
stock companies, and in event of failure often pose as 
unfortunate investors in disastrous enterprises." Hence, 
with this change is introduced another reason for scruti- 
nizing carefully the standing of concerns seeking credit. 

It is extremely important, since credit plays such a 
conspicuous role in industrial life, that it should be on a 
high plane. To this end the reporting agencies have 
been developed, credit and business men's associations 
have been organized, and the government has thrown 
about the creditor certain safeguards — all to make it as 
difficult as possible for the debtor to be dishonest, and to 
minimize losses due to mistakes in lending. 

As soon as business was organized, so that it was no 
longer possible for the seller to meet the buyer face to 
face and to learn the nature of his business standing 



MERCANTILE CREDIT 61 

directly from him, agencies were organized to investi- 
gate the standing of those seeking credit. Now they are 
absolutely essential to credit giving. No 

merchant would think of granting credit with- S°"5^®s °^ 

,. - . , credit in- 

out mvestigatmg the standmg of the buyer formation. 

as reported by the agencies. All dealers are 
consulted once or twice a year by the representatives 
of the commercial agencies for desired information for 
the purpose of establishing their rating, and if the 
information is unsatisfactory, others are consulted. 
When goods are sold by a traveling salesman to 
some new firm, the house, before shipment, investigates 
the standing of the firm as reported by Bradstreet or 
Dun or other agency. If the report is not altogether 
satisfactory the attorney of the company in the locality 
investigates his standing. The advice of the banking 
institutions with whom the debtor deals is always con- 
sidered important. Other methods which will be dis- 
cussed later are used. 

Some time ago 500 letters were sent to a nearly even 
number of manufacturers, jobbers and retailers for the 
purpose of learning the practices relative to discounting, 
credit giving, and related subjects in different parts of the 
country. Over 30 per cent, of these people replied and 
upon their communications the following facts are based. 
The relations between the manufacturer and jobber 
are simple. Jobbers who handle the lines of any 
manufacturer are comparatively few, and it is easy 
to learn their standing. When the manufacturer 
sells to the retailer his interests in giving credit are 



62 MERCANTILE CREDIT 

identical with those of the jobber whose dealings are 
with the retailer. 

Payment within ten days is usually considered cash. 
Beyond this, payments range from twenty days' time to 

over a year. One and two months' time is 
^ d^/ ° usually given on groceries. On tea, and 

coffee in bulk, three and four months are often 
allowed. On dry goods and textiles generally the average 
term of credit is longer. The longest term of credit is 
given on agricultural machinery, and the payments are 
often arranged to be made in installments. 

The comparative terms of credit on the different lines 
of goods have an economic basis. No reason exists for 
What de- extending credit beyond the time when the 
termines buyer sells his goods. Mercantile credit is given 
the term primarily to enable the buyer to pay for goods 

from the proceeds of their sale. As groceries 
may be turned in one or two months, the ordinary term 
of credit on them is from thirty to sixty days. It gen- 
erally requires a longer period for the sale of textiles and 
a longer term of credit is consequently given. Farm im- 
plements are sold by retailers to buyers who usually need 
several months in which to pay for them, and these pay- 
ments are usually arranged to come at times when crops 
are sold. In the case of some other commodities the 
urgency is not so great for granting credit to the con- 
sumer, wherefore, the retailer is inclined to, permit his 
credit relations with the consumer to be determined 
not by the consumer but by the manufacturer and 
jobber. 



MERCANTILE CREDIT 63 

Various methods are employed by manufacturers and 
jobbers to learn the standing of the retailer. All of 
them use the information furnished by the 
leading commercial agencies. Aside from this p^^^^®^ *** 
their methods vary. In giving credit to new ^jq^^ 
customers some require a definite statement 
from them of their financial standing. Others learn what 
they can from their traveling salesmen. Still others find 
out what they can from the local bankers and from other 
houses with whom the debtor has dealings. Then, too, 
manufacturers and jobbers are often organized in credit 
men's associations which are more or less clearing-houses 
of information with reference to the credit standing of 
their customers. So in a variety of ways the financial 
ability and character of the retailer are learned. 

The rate of discount for cash payments varies as 
widely as the term of credit. It varies from 6 per cent, 
to 72 per cent, a year, while the average an- 
nual rate is between 12 and 18 per cent. In The rate 

of dis- 
fixing discounts for cash, manufacturers and count. 

jobbers may wield a ready weapon to force cash 
payments. As a rule the longer the term of credit, the 
higher is the rate of discount, because the more uncertain 
the payment of the obligation. Discounts on groceries 
average about 12 per cent, a year, on textiles about 18 
per cent., while on certain kinds of jewelry the rate is as 
high as 72 per cent, a year. 

High rates are levied to cover losses by failures. 
When conditions are normal, manufacturers and jobbers 
know approximately what losses they will sustain through 



64 MERCANTILE CREDIT 

failures, and therefore, adjust interest charges to cover 

these losses. Those who do not fail are compelled to pay 

the debts of those who fail. If we consider 

Interest rates natural in which the excess above the 

rates cover , ... . 

losses. general rates prevailing on money loans pay 

the losses of bankrupts, it often happens that 
the natural rate deviates from the customary rates. 
There is frequently a tendency to cling to cash discount 
rates when the excess of these rates above the prevailing 
ones more than pays the losses through bankruptcies. 
The manufacturer and jobber are often interested on this 
account in having the debtor take the full term of credit 
rather than pay cash. 

Another reason for the divergence between the so- 
called customary and natural rates lies in the character 

of the merchant's business. From the very 

Why rates ,.,.,. , , 1,1 

on mer- nature of his business he has usually but a 

cantile limited amount of property upon which he can 

loans are secure advances of capital. The value of his 

goods, relatively speaking, is a high percentage 

of the value of the plant. So the scope of his business 

as a merchant is limited directly by the extent to which 

he goes into business loans. On this account discount 

rates may be excessively high to compel purchasers to 

resort to the regular institutions of loan. 

It seems apparent that it is to the interest of the 

retailer to cash all his bills with money borrowed from 

banks. Many do this, and consequently save from 6 to 

12 per cent, a year on purchases. The lack of capital 

of many retailers and the difficulties in the way of 



MERCANTILE CREDIT 65 

borrowing at banks, exclude them from this opportunity. 
To put the matter in another way, the ease with which 
commercial loans can be secured as against the difficulty 
of securing bank loans is responsible for the high rates 
of the former and the low rates of the latter. Banks 
loan only on good collateral, on personal security, and to 
those who have excellent credit standing. The retailer^s 
purchases are comparatively frequent, so that the diffi- 
culties in the way of obtaining good security closes this 
route of escape from high interest charges on capital 
borrowed. There are, however, other merchants whose 
credit at bank is good and who habitually allow the 
term of credit to expire before payments are made. In 
doing so considerable is lost by not appreciating the 
difference between the bank rates of interest and the rates 
charged by lenders of merchandise. 

The credit instruments most commonly used in mer- 
cantile credit are bills of exchange, promissory notes, and 
book accounts. In the first instance the 
seller of goods may write a draft ordering the ^^ * ^J^" 
buyer to pay the amount of the bill a given 
number of days after sight. If the latter accepts it, 
the seller of the merchandise after endorsing the bill 
may sell it at once to his banker as double-name paper, 
or to some one else in the settling of his bills. The 
promissory note may be used in practically the same 
way except that the purchaser of the goods signs a 
promissory note to pay the amount of the bill in a given 
time. In this case as in the former one, after the seller 
of the goods endorses the note it may be sold to his 



66 MERCANTILE CREDIT 

banker or to some one else, usually one to whom he 
owes an account, as double-name paper. The use of 
such credit instruments as bills of exchange and promis- 
sory notes makes it possible for the seller of goods to 
secure funds at once upon credit instruments which are 
an evidence of a loan of thirty, sixty, or ninety days. 
Moreover they are often used as mediums of exchange 
cancelling many obligations and thus dispensing vdih 
the need for money. 

Notes or bills based upon mercantile loans have always 
been considered good bankable paper, and in many com- 
munities the bulk of bank loans are based 
, , upon these credit instruments. As mercan- 

tile loans are always connected with a sale of 
goods it is not possible for merchants to maintain as high 
standards of credit while selling goods as may be main- 
tained by banking institutions whose business is de- 
voted almost exclusively to the making of loans. The 
diverse conditions under which mercantile credit was 
given and the lack of system on the part of merchants in 
giving credit, made it impossible for banks to handle 
all classes of commercial paper offered to them for sale. 
Consequently there has developed a speciaHzed class 
known as note brokers to facilitate the sale of commer- 
cial paper. The note brokers made a study of the value 
of commercial paper a specialty, and consequently be- 
came experts in this department of credit. Acting as 
middle men, they purchased commercial paper from 
business houses and sold it to banking institutions. 
Where banks were unwilling to accept single-name paper, 



MERCANTILE CREDIT 67 

note brokers often either act as endorsers or else secure 
endorsers for these notes. It frequently happens at 
present that no bank will make a single loan in such 
amounts as large mercantile houses desire in order to 
make a cash purchase. In such instances the mercantile 
house will call on a note broker who executes several 
notes and sells them to a number of financial concerns. 
While the note broker came into existence when mercan- 
tile credit was given for from six to twelve months he has 
come to be an important factor in mercantile Hfe with 
the changed organization of business. 

The third form of mercantile credit is the book ac- 
count which is frequently used in the case of sales be- 
tween merchants. When a debt is due the 
account is usually settled by a check upon the 
purchaser's bank. Book accounts are taking 
the place of promissory notes and commercial drafts but 
they are not as serviceable to sellers of merchandise in 
enabling them to realize at once upon accounts where 
time is given for the payment of bills. The promissory 
note and the bill of exchange can be sold at once. The 
seller of goods may sell his book account or borrow upon 
it, but it is more difficult to sell it or borrow upon it 
than it is to sell either the bill of exchange or a promis- 
sory note. When either of the latter is sold its genuine- 
ness is attested by the signature of the maker of the 
paper and when both the note and bill are endorsed, as 
is usually the case, two parties are pledged to the pay- 
ment of the instrument. Upon the other hand the pur- 
chaser or assignee of the book account must depend for 



68 MERCANTILE CREDIT 

its validity on the representation of the man who sells it 
or who borrows upon it, and on this account the latter 
must be well known to the former. 

A regular system has developed of lending on book 
accounts, and in some instances commercial banks main- 
tain separate departments to pass judgment upon the 
value of this class of accounts, while in other instances 
brokerage houses, or commission houses, have developed 
to negotiate loans upon book accoimts. Prendergast 
claims that ''it is probable that this method found its 
inception in a practice, introduced some years ago, where- 
by a house having no other form of collateral to offer its 
bank, and being much in need of money, induced its 
bank to accept an assignment of certain accounts. Ad- 
vances were made by the bank to an agreed percentage 
of the gross amount of the accounts assigned."^ 

There are three methods by which the man who sells 
merchandise on time may realize at once on his book 
Methods accoimts: 1. He may sell his book account 
of lending outright, in which case the purchaser assumes 
on book all risks and charges high interest rates and 
accoun s. ^^^q ^ bonus proportioned to the degree of the 
risk. 2. The seller of merchandise may assign his book 
account and borrow upon it up to a certain per cent, of 
the value of the account. The assignor in this case per- 
mits the borrower to collect from the funds assigned, and, 
in place of these, others may be assigned to the bank to 
keep up the ratio agreed upon. Of course in this case, 
if the assignor should fail or if for any reason the credit 
* Credit and Its Uses, p. 115. 



MERCANTILE CREDIT 69 

relations between the borrower and lender should be 
broken, the assignee would proceed at once to collect 
the assigned accounts. 3. In another case the assignee 
may advance funds to a certain percentage of the value 
of the account and charge a heavy interest rate and a 
bonus for the service rendered. The funds obtained 
by the borrower in this instance are secured under more 
unfavorable conditions than in the former one. In most 
of the latter cases a higher interest rate is exacted than in 
the former case, and, as the lending institution collects the 
accounts, the selling house suffers somewhat in its repu- 
tation, as its customers are made aware of the fact that 
its accounts are assigned and that it does not enjoy a 
high grade of credit; whereas in the method described in 
(2), the borrower collects his own accounts and his 
customers have no knowledge of the assignment of 
accounts. 

In still another case where book accounts are as- 
signed, the assignee may proceed at once to collect the 
accounts. 

Commission houses have developed in recent years to 

deal exclusively in book accounts; and, as they advance 

funds and discount accounts, they are in this 

respect bankers. Their numbers in large g.^^ 

commercial centers attest the profitableness houses 

of the business in which they are engaged. ^^^^ ^^ 

Many of them have back of them wealthy °^ 

Accounts. 

banks and trust companies which find in the 
advancement of funds to these institutions, a lucrative 
field of investment. 



70 MERCANTILE CREDIT 

The rates charged are a further evidence of the differ- 
ence in rates between regular banking loans and mercan- 
tile loans. 

An important change has been introduced in the sys- 
tem of credit giving by the practice of dating ahead. 
An impression prevails that dating ahead 
^ ^^ and credit giving are the same. On the con- 
trary, they are distinct, although directly 
related. When we depended upon foreign countries for 
the bulk of our manufactured goods, it was necessary 
for the importer and jobber to carry all lines in stock 
which were sold to the retailer. When the American 
manufacturers began to supply the consumers it was 
learned that there would be a clear advantage in selling 
all commodities, not staples, before they were produced. 
Such commodities as sugar, flour, and the cruder kind of 
textiles can be kept in stock, as the demand for them is 
comparatively regular. But changes in fashion and differ- 
ence in kind of commodity with the consequent uncer- 
tainty of demand, makes the production in advance of 
all products not of the staple type a hazardous enter- 
prise, and producers are unwilling to take the risk. 

The method of procedure in dating ahead is as follows: 
The manufacturer or wholesaler goes to the retailer in 
the fall and takes orders for spring and summer 
Method of gQ^^jg^ After the orders are taken the goods 
ahead. ^^^ produced. The goods are dated, we will 

say, February 1, but the manufacturer ships 
the goods to the retailer as soon as they are manufactured. 
If the goods are paid for within ten days of the first of 



MERCANTILE CREDIT 71 

February, then payment is usually considered cash, and 
all payments are dated from February 1. But the re- 
tailer may have the goods in his possession before the first 
of the month and some of them often as long as six weeks 
or two months prior to the time the goods are dated. 
In a sense, dating ahead prolongs the term of credit by 
the interval between the shipment and dating of the 
goods. The keeping of goods in stock compels retailers 
to increase their insurance account. In all cases where 
goods are sold before the time of dating, an advantage 
is gained. However, in such cases competition between 
dealers often results in extending credit to consumers. 
So the system of dating ahead is not only an extension of 
credit itself but it indirectly results in the prolongation 
of the term of credit. 

Mr. Prendergast, in Credit and Its UseSy gives a 
somewhat different interpretation of dating. "The dis- 
continuance of *long time^ such as four, six, and eight 
months, has had the effect of introducing the feature of 
Mating^ into commercial transactions and credit. A 
'dating' of thirty days or sixty days indicates that the 
term of credit, whatever it may be, does not begin to date 
until the expiration of the term of dating. For instance, 
a bill sold and charged on January 1, 1906, with a dating 
of sixty days — terms, 2 per cent, ten days and net thirty 
days — is not due until April 1, as the dating does not 
expire until March 1, and the terms being thirty days 
carry it to April 1. The purchaser has the option of pay- 
ing it whenever he chooses, but payment cannot be in- 
sisted upon until April 1. A merchant purchasing a bill 



72 MERCANTILE CREDIT 

under the foregoing terms would, if he were in a position to 
do so, pay the bill at the end of ten days (January 10), 
deduct his 2 per cent, discount, and also deduct interest 
at the rate of 6 per cent, per annum for the unexpired 
term of sixty days (the dating), of which time he has not 
availed himself." 

This author then assigns other reasons for dating. 
Whether "dating" grew out of an endeavor to shorten 
the term of credit, as it undoubtedly did, in many cases, 
or has other reasons for its existence its effect is always the 
same, it really extends the term of credit. 

Aside from prolonging the term of credit, dating ahead 

increases credit giving. When the goods are dated 

^ ^. ahead they cannot be sold C. 0. D. Under 

Dating 

ahead in- ^^^^ system it is not always within the power 

creases of the seller to dictate the terms of payment. 

credit When the goods are not shipped C. 0. D., if 

civinfi[* 

the buyer should refuse to pay within ten days, 

the term of grace usually allowed for cash payments, the 
only recourse of the creditor is either to refuse to have 
further dealings with the buyer or to institute proceedings 
to collect the account. Injury to the buyer's standing by 
recourse to either of these methods may often be ade- 
quate to force him to abide strictly by his contract. 
The point of interest in this connection is that the 
system itself practically provides for credit giving. 

The system has also another bearing on credit. The 
manufacturer is relieved of the necessity of taking 
chances on production. As goods are shipped as soon as 
produced, he is also relieved of the necessity of carrying 



MERCANTILE CREDIT 73 

insurance on the stock. However, these advantages may 
be counteracted to a certain extent by interest accounts 
on long period datings. As soon as dating Advan- 
ahead came to be generally practised, competi- tages of 
tion extended the period of the dating. This <^ati^g 

ahead 

meant for the producer a prolongation of the ^^ manu- 
interval between production and sale, if we facturers 
consider the sale for practical purposes to f^^ 
take place when the goods are dated. The ^^ 
traveUng salesman is out taking orders, and the goods 
are produced long before they are paid for. It matters 
not for our purpose whether we consider this an increase 
of interest account of capital expended, or an extension 
of credit. The result is the same. In dating ahead the 
producer has the advantage of regularity, certainty and 
avoidance of risk in an extension of credit. 

In dating ahead the risk is transferred from the manu- 
facturer and wholesaler to the retailer. In the effect 
of the system on the mind of the retailer we influence 
find another influence tending to increase both of dating 
credit transactions and the number of failures, ^ead on 
The longer you postpone the time of payment 
the more reckless and indifferent people are in giving 
orders. Purchasing unnecessary and unsalable goods 
results in an enforced extension of the term of credit. 
Failures to a very large extent result from having in 
stock unsalable goods. 

Since the ending of the crisis in the United States 
fifteen years ago there has been some agitation favoring 
a shortening of the term of credit and the abandonment 



74 MERCANTILE CREDIT 

of commercial credit wherever possible. The organiza- 
tion of the business community practically forbids mak- 
ing much headway in the latter movement. However, 
much advancement has been made in the last ten years 
in systematizing the methods of giving credit and in 
minimizing losses resulting from credit giving. 



CHAPTER V 
PERSONAL CREDIT 

Peesonal or individual credit is the power of an 
individual to secure something of value in the present 
for a promise to pay in the future. It in- definition 
eludes credit used to secure production as well of 
as consumption goods, and the credit of personal 
partnerships as well as of individuals. Its 
most common kind to-day is the credit secured at the 
retail store; that is, the power to secure goods in exchange 
for a promise to pay in the future. It is also used to 
secure medical, legal and other expert service, and 
to borrow money which may be used for a variety of 
purposes, chiefly of an individual or personal character. 
Because the things procured by personal credit are used 
largely for individual ends, or for purposes of consump- 
tion, it is sometimes known as consumptive credit. In 
this discussion personal credit is given a broader meaning. 

It is sometimes difficult to state at what point mercan- 
tile credit ends and personal credit begins. 
The purchasing of goods on time for purposes ^^^ ^^^^ 
of final consumption, from the point of view cantile 
of the buyer is clearly a case of individual credit 
credit. Should the sale of goods on time by ^^" , 
the retailer be placed in a different category 
than the sale of goods on time by either the manufacturer 

75 



76 MERCANTILE CREDIT 

or the wholesaler? When the manufacturer sells to the 
wholesaler on time, the latter often desires time in order 
that he may pay for the goods from the proceeds of their 
sale. Credit is granted by the manufacturer and re- 
quested by the wholesaler to facilitate the sale of goods. 
In this sense the function rendered by credit is quasi- 
public if we assume that a social service is furnished in 
the distribution of industrial products. A similar con- 
dition prevails when credit is given the retailer, as in 
theory he is granted time to enable him to pay for 
goods from the proceeds of their sale. 

The retailer does not give credit to enable the pur- 
chaser to pay for them from the proceeds of their sale, 
because in the case of consumption goods they are bought 
not for sale but for consumption purposes. The sale of 
goods on time by the retailer is not considered mercan- 
tile credit, as time for payment is not given to facilitate 
their future sale. In the case of production goods sold 
by the retailer, a variety of reasons determine the giving 
of credit and the terms of credit. In some instances 
credit is granted in order that the goods may in part pay 
for themselves. In the case of producer's goods sold for 
farming purposes, the time of payment usually coincides 
with the period of marketing farm products. In general, 
credit is given by the retailer because the buyer is unable 
to pay cash, whether the goods he buys are for production 
or consumption purposes. 

The success of all the distributors from the manu- 
facturer to the retailer depends upon the payments by the 
final purchasers to the retailers. Although the goods 



PERSONAL CREDIT 77 

purchased from the retailers on time are usually put to a 
different use by their buyers than the goods purchased 
by the preceding groups in the chain of dis- 
tribution, the sale in each case is a loan of ^®^c^" 

tile 
goods, and the final payments to the retailers credit de- 
serve to cancel the preceding obligations in- pendent 
curred upon the same goods by the preceding °^ 
groups of distributors. I do not mean to say ^jg^j^^ 
that the manufacturer and jobber must wait 
until goods are paid for by consumers, but that the whole 
superstructure of mercantile credit breaks down if the 
final purchaser is unable to meet his obligations. 
Mercantile credit and personal credit are so closely 
related that a complete consideration of the former 
warrants a treatment of the latter. 

Personal credit is given to a large multitude of people 
under a great variety of conditions, and the laws 
governing the dispensers of personal credit are Ukewise 
various. The system of selling on time by retailers, the 
methods of investigating the standing of those seeking 
credit, and the influence of the extension of credit upon 
methods of selling and upon the prices of goods, will be 
considered. 

When personal credit is used to secure money, the 
lender may be an individual, a partnership. Banking 
a corporation, or a banking institution. ^^^ 
When the lender is a bank, a confusion ^^'^^^^ 
may arise between banking credit and per- con- 
sonal credit. It is in possessing credit, or in trasted. 
manufacturing credit, that a bank's chief function as a 



78 MERCANTILE CREDIT 

credit institution consists. However, its capacity to 
create credit depends chiefly on its skill in granting 
credit; while individuals, partnerships, and corporations, 
are the grantees of credit by banking institutions. The 
borrowing of funds by an individual from a bank is a 
personal credit and not a banking credit transaction. 

Personal or individual credit was the oldest form of 
credit. As has been pointed out, people in prehistoric 
Personal ti°i6s enjoyed credit although they did not 
credit of possess what might be called a credit system. 
®arly In the hunting stage of society those success- 

°^®^* ful in the chase loaned to their unfortunate 

neighbors. At this time charitable impulses inspired 
lending. The borrower returned either in kind or in 
money the amount of the loan without paying interest. 
The public sentiment of the primitive community required 
that the wealthy should help temporarily those who had 
suffered misfortune and that no interest charges should 
be made for the advancement of funds. This public 
sentiment had at first the binding force of law. Later 
when interest charges were made by the few who took 
advantage of the poverty of those who sought credit, 
nearly all the early nations passed laws forbidding usury 
and imposed severe penalties for usurious charges. The 
literature of the times teems with discussions on the 
iniquity of the lender whose wealth grows at the expense 
of his less fortunate neighbor. 

So long as loans were made chiefly to borrowers who 
were in desperate circumstances who were compelled to 
meet obligations at an appointed time and were unable 



PERSONAL CREDIT 79 

to do so without borrowing, the sentiment and the laws 
against usury prevailed. When industrial development 
had assumed a new form, when people bor- 
rowed money to invest in industrial under- chances 
takings, the former views with reference to brought 
usury passed away. When the borrower ob- about 
tained funds to invest in profitable undertak- , 
ings it became obvious that those who had 
saved and hoarded their funds were entitled to a share 
in the profits of the business in which their money in the 
hands of the borrower was invested. This new develop- 
ment gave rise to our present views of loans and of inter- 
est. Personal or individual credit has thus preceded all 
the other forms of credit and gradually merged into 
mercantile, capital and banking credit. 

To-day it represents the most varied and unsystematic 
kind of credit. The people who receive personal credit 
represent all stages and conditions of life. 
As nearly all people receive credit at one time ^^^^^ 
or another, a classification of those who re- receive 

ceive personal credit would include practically personal 

credit 
the whole of the human race. The wage- 
earner is granted credit from his grocery store until 
Saturday night when he receives his pay. Those who 
work for salaries which are paid monthly often receive 
credit either from necessity or convenience, and if the 
time of payment coincides with the period when income 
is received, the term of credit in this case should be longer 
then when income is received weekly. Professional 
people and men of means are granted credit because it 



80 MERCANTILE CREDIT 

is more convenient to pay in large amounts than to carry 
funds and pay on each occasion of purchase. Each of 
these classes lends itself to a great variety of sub-divisions, 
consequently the number of classes seeking personal credit 
place insurmountable obstacles in the way of classifying 
them. 

Personal credit is likewise granted by a great variety 
of institutions and classes of people. The retail institu- 
^jj^ tion giving the greatest amount of credit is 

grants the grocery store. Purchases at the grocery 

personal store are made very frequently, sometimes 
several times a day in cities and towns, and 
it is consequently inconvenient to pay cash on each 
occasion of purchase. The grocery store is a community 
institution and it is assumed that the management has 
a better knowledge of buyers than in stores where pur- 
chases are not made so frequently and where the retail 
institution is not to such an extent a community institu- 
tion. Credit is obtained at dry goods stores, drug stores, 
hardware stores, etc., but not so often as in the grocery 
store for the above-named reasons. As groceries are 
life necessities we find another reason why it is difficult 
to refuse credit to those who have been by misfortune 
suddenly rendered imable to pay their debts. The uses 
of things which are purchased of retailers have much to 
do with the granting of personal credit and the terms of 
personal credit. The use of dry goods, drugs, hardware, 
books, etc., are not often absolutely essential to life and 
consequently the need to give credit on these things is 
not so imperative as on groceries. Hardware and imple- 



PERSONAL CREDIT 81 

ment products are chiefly producers' goods and the use 
to which these things are put determines largely the con- 
ditions of credit. Personal credit is often given for the 
professional services of lawyers, physicians, etc. In the 
very nature of things some credit must be given for these 
services as the service is rendered on the installment 
plan and payment cannot be expected until the service 
is completed. Personal credit is often given in the form 
of a loan of funds in which the purposes to which the 
funds are to be devoted may or may not be stated as a 
condition of making the loan. As no rules of classifica- 
tion can be very easily apphed to either the receiver of 
personal credit, the giver of personal credit, or to the 
purposes to which the borrowed funds are devoted, it is 
difficult to lay down any definite rules which govern the 
granters of personal credit. 

The conditions under which goods are sold make 
cash payments in many instances inconvenient if not 
impossible. First, let us take the case 
of the retail grocery store, the institution necessary 
which gives the greatest amount of personal for 
credit. As a rule, groceries are delivered to grocers 
customers. Competition between stores has ° ^\^® 
led the great majority of them in our cities to 
send delivery boys to homes to take orders or to use the 
phone to secure orders for daily deliveries. The house- 
wife, too, uses the phone to order goods. This is done 
frequently several times a day. In all these cases it 
is impossible for the retailer to receive cash payments 
on the delivery of his goods, and the cases are exceptional 



82 MERCANTILE CREDIT 

where he does receive cash. In a great minority of in- 
stances are goods purchased by those who visit the grocery 
stores. Even in these instances groceries are purchased 
so frequently that it is inconvenient to carry funds to 
make cash payments. Those who visit grocery stores 
to make purchases in most instances give orders also by 
phone or to the delivery boy who visits the home of the 
customer. The circumstances surrounding purchases in 
the regular grocery store make cash payments almost an 
impossibility. When cash payment is not made for 
goods, the salesman furnishes to the purchaser of grocer- 
ies a bill or account itemizing the things purchased with 
the price of each. In some instances those who have 
a credit account at a store carry an account book in which 
the salesman makes a list of the things purchased with the 
price of each on the occasion of each purchase. 

As an exception to the rule that grocery stores give 
credit, a number of stores, especially chain stores, do a 

strictly cash business. However, to sell only 
Some 
grocery ^^^ ^^^^ many of them do not deliver goods 

stores do thus requiring the purchaser to come to the 

not give store to take his purchases home with him. 

To conduct a cash business and to decline to 

furnish a delivery service requires such stores to sell their 

goods much cheaper than goods are sold at the regular 

grocery stores. 

In other retail institutions as dry goods, hardware, 

shoe, drug, clothing, gents^ furnishing, and department 

stores, the giving of credit is not so common. However, 

in practically all of these stores except the hardware 



PERSONAL CREDIT 83 

and gents' furnishing stores, the great bulk of goods is 

purchased by women or other members of the family 

than the breadwinner who ordinarily has ^ 

Personal 
charge of the finances of the household. It is credit 

much more convenient for those who pur- given by 

chase to buy on credit than to pay for goods. *^*^®' 

stores 
Moreover, the custom of paying by check 

rather than by cash is greatly on the increase. Those 

who can get credit allow their bills to run till the close of 

the month, and it has become the accepted practice of the 

great majority of retail institutions to render an account 

at the close of each month to their customers who have 

been given credit. They then receive checks from their 

customers shortly afterward which are returned to them 

receipted. This has become almost the regular way 

of making payments for public utility service such as 

for heating and lighting and for other kinds of service 

such as laundry, cleaning, etc. 

Where the custom exists of rendering an account at 

the close of each month a ready weapon is at hand for 

the creditor to enforce prompt collections. 

The debtor is presumed to pay his bills at the ^'editor 

responsi" 
close of each month when the accounts are ^i^ f^^ 

rendered. If he refuses to do so the retailer habits of 

can either insist on prompt payment or with- payment 

hold credit from him in the future. The chaser 

postponement of the payment of accounts, 

and the running up of bills beyond the capacity of the 

debtor to pay, may often be traced to the carelessness and 

the indifference of the retailer who gives credit. 



84 MERCANTILE CREDIT 

The position of the retailer is wholly different from 

that of the manufacturer and jobber in giving credit. 

The manufacturer and the jobber must rely 

or^ e- ^^ mercantile agencies and other sources of in- 
termining . 

the formation to learn the standing of their cus- 

granting tomers, while the investigations of the retailer 

of credit ^^e more direct. The methods of the retailer 

by 

retailers depend upon his location, and the character 

of his trade. The retailer often knows person- 
ally all his customers, of their ability to pay, of their 
promptness and of their credit worth. In large cities where 
dealers have a great variety of customers, and in small 
places where there is a transient trade, their credit prob- 
lems are more difficult. The usual method of procedure 
when an applicant for credit appears is to ask for refer- 
ences to other dealers with whom the customer had 
credit relations. Others investigate if the customer has 
property. Some give credit on the evidence of honesty 
judged from a few moments' conversation. Still others 
will grant credit after learning where the man works and of 
his ways of spending his money. In some cities retailers 
are organized in local credit men's associations, and 
through these organizations they avoid making loans to 
irresponsible persons. The range of losses varies with the 
class of creditors, the kind of business, and the section of 
country. Some say that only 1/2 per cent, of their total 
sales are uncollectable, while others place this percent- 
age of loss as high as 5 per cent. It will be seen that the 
information which determines the granting of credit by 
retailers is derived from a great variety of sources. 



PERSONAL CREDIT 85 

The following are some of the reasons why credit is 
given unwisely by retailers: 

1. Many retailers are anxious to do a large business 
and to give external evidences of doing a very prosperous 
business. To attract many customers it is necessary 
to give them credit on easy terms and to deal leniently 
with them in making collections. Such retailers com- 
pete with each other to carry on an extensive trade, 
establish easy standards of credit, and demoralize the 
personal credit market. 

2. Other retailers do not keep adequate books, do 
not know the costs of conducting their business, and do 
not know their credit losses. Bradstreet's estimates 
of the causes of business failures show that approxi- 
mately one-fourth of them are due to incompetence, and 
failure to keep books is mentioned as the first evidence 
of incompetence. It is safe to say that if retailers knew 
the costs of giving credit they would be more conserva- 
tive in this department of their business activities. 

3. Fear of driving away customers deters many re- 
tailers from making adequate inquiries regarding the 
credit standing of those who wish to buy on time. As 
there is no recognized system or method of inquiry, 
retailers are timid about making necessary investigations 
of the credit worth of their customers, and the latter are 
inclined to resent such investigations. If there were a 
customary method of procedure by retailers, seekers for 
credit would accept as a matter of course all legitimate 
inquiries concerning their ability and willingness to pay 
their debts. 



86 MERCANTILE CREDIT 

4. As personal credit has been given in a haphazard 
way no definite knowledge exists with reference to 
the right basis for personal credit. The conditions of 
wealth, of character, of ability to pay, of family status, 
etc., which should determine whether credit is to be 
given at all or how much should be given, are factors 
which have never been adequately investigated. Again 
the poverty of the consumer or in other words his in- 
ability to pay, is often a reason for giving credit by some 
retailers. It is difficult for a grocer, for instance, to re- 
fuse credit to a wage-earner who has always paid his 
debts promptly, but who, through the loss of his position 
has been suddenly rendered unable to pay his debts. 

5. There is also a great lack of knowledge of the need 
for credit. This does not apply to buyers who pay their 
bills monthly as a matter of convenience instead of 
paying cash for each individual purchase, but to those 
who do not pay promptly because they have no funds 
with which to pay. Retailers seem hopelessly ignorant 
as to whether their customers are able to pay cash or 
when they are able to pay. As consumers pay no more 
for goods they buy on time than those for which they 
pay cash there is no inducement for them to pay cash as 
long as credit is given them. 

6. Retailers have ordinarily no facilities to find out 
the credit standing of their customers. When manu- 
facturers and jobbers give credit to retailers they may 
proceed with greater accuracy as mercantile agencies 
furnish information on the credit standing of all busi- 
nesses. Moreover, they have other sources of information 



PERSONAL CREDIT 87 

which are described elsewhere, on which they can safely 
rely. Those who receive personal credit as stated above 
consist of the rank and file of humanity, and no facilities 
have as yet developed to learn their credit standing. 
It is safe to say that if retailers had the opportunity they 
would learn if their customers were worthy of credit or 
not. 

What is said here does not apply to department stores 
and other large retail institutions that employ agents 
to investigate the standing of applicants for credit, and 
who employ some system in granting credit. Moreover, 
retailers along several lines in some of our cities have 
formed organizations to exchange credit information and 
these give credit with a great deal of care. The work 
of these associations will be discussed later under the 
subject, Credit Exchanges. 

It has been stated that there are no definite principles 

to guide the retailer in determining upon credit risks. 

As far as can be learned retailers are governed „„ 

<• T . 1 What de- 

by three sets of conditions: 1. character; 2. termines 

wealth and earning power; 3. character, hab- the 

its of payment, habits of life, and habits of Slanting 
,. , . of credit, 

spending or buying. 

In no division of credit does so much depend on the 

character of the applicant as in personal credit. In 

other cases, wealth and ability to pay are ^^ 

Character, 
primary requisites. In personal credit a 

man without wealth or apparent ability to pay may 

receive credit if it is known that he is honest, that he 

treats his financial obligations very seriously, that he 



88 MERCANTILE CREDIT 

would oe willing to do almost anything than to fail to 
pay his debts. Such a person may enjoy excellent credit 
whereas one of considerable wealth but who is slow in 
making payments, may not have good credit. 

The latter class usually enjoys good credit because in 
cases of emergency, debts can be collected, and frequently 
Wealth ^ declaration of intention to take legal action 
and is sufficient to secure payment. Individuals 

ability to -with ability to pay, but without wealth, are 
o pay. usually those of good incomes obtained by 
salaries or as fees by rendering personal service. Those 
whose income is secured through fees are professional 
men as lawyers, physicians, dentists, etc. These men 
ordinarily enjoy good credit because as a rule they 
receive good incomes and their professional honor and 
standing in the community demand that they meet their 
obligations promptly. Those who work for salaries 
are chiefly ministers, teachers and those engaged in a 
high grade of work in industrial pursuits. As they have 
regular salaries it is not difficult for them to adapt their 
expenditures to their income. As long as their salaries 
continue, a convenient means is always at hand to a 
retailer to collect payment by attaching the salary. 

The previous record of the customer is perhaps the safest 

guide to the retailer in giving or in withholding credit. 

^ , . If the seeker for credit is delinquent in mak- 

Haoits. 

ing payments, and if it is difficult to collect 

from him, credit is either given him unwillingly or it is 

withheld. Where credit cooperation methods prevail, this 

factor is considered very important and the customer's 



PERSONAL CREDIT 89 

record with other retailers in this respect is taken into 
account when he solicits credit. Upon the other hand, 
if the consumer pays his debts promptly, a limited amount 
of credit is given without any reference to his wealth or 
his ability to pay. 

The habits of life of the buyer and of his family are 
also important factors determining what credit should be 
given. Habits of life include personal habits, habits of 
industry of the bread winner, and habits of economy or 
of extravagance of his family. It is sufficient to say that 
if the bread winner has good habits and is industrious, 
and his family does not live beyond his means that 
ordinarily good credit will be enjoyed. Upon the other 
hand, if just the opposite conditions prevail, or any one of 
them, such a family should be given either no credit at 
all, or very limited credit. 

Closely associated with the extravagance of a family 
as a guide to credit giving are habits of purchasing. If 
a family purchases unwisely, that is, purchases what it 
does not need or purchases in excess of its needs, it is an 
argument in favor of either denying or limiting the 
amount of credit given. 

The extensive granting of credit has an important 

influence on extravagance. Compelling customers to 

pay cash imposes on them the obligation to 

adapt their expenditures to their income, ^f credit 

Where they can postpone the time of payment, and 

this postponement begets a spirit of extrava- e^trava- 

finance 
gance, goods are purchased beyond the power 

of payment, and an artificial demand is created for goods 



90 MERCANTILE CREDIT 

not warranted by the ability of consumers to pay for 
them. 

In mining districts, lumber camps, and in some manu- 
facturing towns a kind of personal credit has developed 
Credit which has become peculiarly reprehensible 

given by on account of its influence on the working men. 
company Jn these centers the companies owning the 
s ores. plants own also some or all of the stores and 
often the homes where the wage-earners live. Credit 
is freely given at the company store and when the wage- 
earner's income is received, practically all of it goes to 
pay for groceries, drygoods, rent, etc. On account of 
low wages and the free granting of credit, the wage-earner 
is frequently behind in his payments for these things and 
when credit has become imperative for him, he buys exclu- 
sively at the company stores, and because he is not free to 
purchase anywhere else he pays excessive prices for his 
goods. To prevent this kind of exploitation, many states 
have passed laws either prohibiting company stores al- 
together or else requiring that the prices charged by com- 
pany stores shall not be in excess of the prices charged for 
similar things at competing stores. 

Installment sales is another form of credit which is 
used persistently at the present time. Household goods, 
furniture, clothing, books, pictures, jewelry. 
Install- insurance, etc., may be purchased in install- 
sales. ments, and some houses are organized specific- 

ally to sell their products in this way. The 
usual plan is to require a cash payment and then a cer- 
tain amount each month until goods are paid for. An 



PERSONAL CREDIT 91 

agent usually makes periodical calls to obtain these 
installment payments. For larger purchases the buyer 
usually gives a chattel mortgage, and in the event of 
failure to pay the debt, the company may take not only 
the goods sold, but also the pledged chattels. In 
case of small purchases no mortgage is given, and the 
seller recovers the goods sold when the buyer fails to 
make his regular payments. 

The evils of installment sales are twofold: 1. It is 
notorious that of all goods that are sold those pur- 
chased on the installment plan are obtained ^^^ ^^jjg 
with least reference to the needs of pur- of install- 
chasers. Only a dollar a month, is a n^®^* 
bait which has induced many an extrava- 
gant purchase. In the mill and mining towns, organs, 
pianos and victrolas are purchased by wage-earners on 
the installment plan, and prices are paid for these things 
out of all proportion to the income of working men's 
families. In all cities a great variety of things are sold 
to poor people for which they have very little need, be- 
cause the burdens of payment seem to be light because 
they are distributed over long periods of time. 2. The 
expenses of selling on the installment plan are heavy, 
and the consumer pays the extra costs of selling. If a 
chattel mortgage is given some expense is incurred in 
writing the mortgage. If the goods are sold by agents, 
the traveling expenses of these agents must be paid. As 
the installments are usually paid to agents the cost of 
collection by these agents must be borne by the pur- 
chasers. As the losses from installment sales are greater 



92 MERCANTILE CREDIT 

than from other sales, these excessive costs too, must be 
borne by the installment purchasers who pay their 
obligations. 

The chief advertisement of many retail houses is 
"We will give you credit or "Your credit is good." 
2^^ When this inducement is offered to buyers, 

credit is the sellers cannot exercise reasonable care in 
given distinguishing between those entitled to credit 

care ess y. ^^^ those not so entitled. Moreover, other 
stores send out notices to prospective customers made up 
from lists without any reference to credit standing, telling 
them that their credit is good at the stores. Such loose 
methods in giving credit stand in the way of positive re- 
forms in systematizing personal credit. 

The burdens of unwise credit, in the end, rest with the 
consumer. High prices to consumers, which mean a high 
cost of living, are traceable in part to the costs 
consumer ^^ giving consumers credit. Personal credit 
bears the is responsible for high prices in the following 
burden of ways: 1. Consumers who pay their bills pay 
""T't^ in terms of higher prices for the goods of those 
who do not pay their bills. Retailers who 
give credit must secure a fair income for what they sell, 
and on this account prices are placed high enough to 
cover all losses and to make a reasonable proj&t; so that 
those who pay will eventually pay the bills of those who 
cannot pay for what they buy. It is on this account 
that many consumers who pay cash refuse to patron- 
ize stores that give credit, realizing that they are paying 
other people's bills. 2. Where goods are sold on time 



PERSONAL CREDIT 93 

an interest rate is charged, and the prices paid cover not 
only the value of the goods but also the interest charged 
on the loan pending payment for them. 3. The cost of 
maintaining a credit system, including the cost of keeping 
books and of collecting bills, is added to the price of the 
goods. 

It is difficult to estimate the extent to which goods 
are increased in price by the costs of the credit system. 
Mr. Daniel B. Murphy^ of Rochester, New credit 
York, quoting from reports of Mercantile and high 
agencies showed that the annual losses from costs of 
financial failures in the United States from *^*^S« 
1890-1899 averaged $178,871,026.70. He further states 
that "These stupendous figures — appalling though they 
be — do not include the untold millions that are absolutely 
lost each year by merchants engaged in retail trade, in 
every line of industry, in every town and cross-road, from 
ocean to ocean, from the lakes to the gulf, comprising 
every retail enterprise from the gigantic department stores 
in our great cities to the humble rural dealers. These 
figures do not include the very considerable loss sus- 
tained by those engaged in the learned professions — 
notably by the physicians of the country — nor do they 
include the enormous losses of a personal and confidential 
nature, that are not submitted to the gaze and scrutiny 
of the public.'^ 

* The objects and possibilities of Credit Men's Associations, 1900. 



CHAPTER VI 

THE CREDIT MAN 

The credit man, like many of the leading factors of 

to-day, came into prominence as one of the inevitable con- 

^ . sequences of expansion of trade and concentra- 

Orgamza- 

tion of ^^^^ ^^ industry. Before the traveling sales- 

mercan- man evolved, the area of trade occupied by the 
^^® jobber and manufacturer was comparatively 

narrow. The merchant visited the house, 
made his purchases, and, after a face to face meeting of 
buyer and seller, the terms of payment were arranged. 
When the merchant ceased to visit the jobber and manu- 
facturer, the simple way of arranging payments was aban- 
doned. The traveling salesman now stands between the 
jobber or manufacturer and the retail merchant, while the 
mercaotile agency is one of the chief sources of informa- 
tion on the credit standing of the retailer. The territory 
over which the manufacturer and jobber transact busi- 
ness has been greatly extended, and much has been 
gained in the rapidity of business methods. The rapid 
means of transportation, the lowering of the charges of 
shipping, and the improvements in communication, have 
all been responsible for this enlargement of markets. 

These changes have introduced the credit department 
into all large jobbing and manufacturing houses. The 

94 



THE CREDIT MAN 95 

head of this department, after he has made a careful 

investigation of the concern seeking credit, is intrusted 

with the task of approving or rejecting its 

orders for goods. To him is intrusted also ^^^^ °f, 
. the credit 

the duty of watching all accounts, of collect- j^^n. 

ing them when due, or of extending the time 
as the conditions seem to warrant. In all houses not 
of sufficient importance to have a regular credit depart- 
ment the work belonging to such a department is care- 
fully managed by other departments. 

The purpose of the credit man is to keep the percentage 
of losses at a low point. To do this not only must he 
exercise excellent judgment in granting credit, but he 
must be a good collector. A low percentage of losses is 
not necessarily the criterion of a good credit man. He 
who refuses all orders except from those houses whose 
standing is known to be absolutely reliable drives away 
much profitable trade. So he is compelled to give credit 
to a class of merchants whose credit standing is not of the 
best, but upon whose trade the profits exceed the losses. 
It is upon orders from such a class that he must re- 
peatedly exercise his judgment as to whether the prob- 
abilities of profit exceed those of loss. The other part of 
his task lies in the appKcation of skill in collecting 
accounts. Vigor and persistence in following up delin- 
quent debtors and tact in handling them are requisites 
for every successful credit man. 

In order to accomplish these things the credit man 
must be in possession of a very broad range of facts. He 
relies upon several, sometimes all, of the following sources 



96 MERCANTILE CREDIT 

of information: reports of mercantile agencies, the travel- 
ing salesman of the house employing him, the attorney 
of the house, an attorney in the community 

Sources of ^f ^^^ dealer, the debtor^s banker, firms with 
infomia- 

tion. whom the debtor has dealings, and the state- 

ment of the debtor. All these means of pro- 
curing information are open to the credit man, and he 
uses them as conditions warrant. 

The credit man must be familiar with the laws re- 
garding indebtedness in the states in which his firm deals, 
and must know exactly the methods of pro- 
Laws of cedure under the national bankruptcy law. 
different _ , . .. 
states. ^^ decidmg upon terms of contract, the laws 

of the state must not be violated. Houses 
often fall into endless diflaculties because, not having 
adequate knowledge of the state laws concerning in- 
debtedness, they fail to collect many of their debts. A 
knowledge of the laws of the states is of value, not only 
in making terms of payment, but also in assisting the 
collector to determine upon proper methods of pro- 
cedure. If the business methods and customs of states 
and localities differ, the credit man must be cognizant 
of these facts, and must understand thoroughly the busi- 
ness peculiarities, if any exist, in each locality in which 
his firm has business dealings. 

He must be familiar with the industrial, and com- 
petitive conditions upon which the success of the mer- 
chant depends. He must know what need there is 
for such an institution in the city or the part of the city 
where the merchant is located. He must know if the 



THE CREDIT MAN 97 

competition in the debtor's line is very severe, or if he is 
located in a splendid field for his business. It is very 
generally believed that department store and 
branch store competition, and the competi- conditions 
tion of merchants who purchase collectively where 
in some cities, make the existence of certain credit 
classes of dealers precarious. In certain cities ^P^ 
these competitive forces act more strongly in 
certain lines than in others. These are factors which 
must be taken into account by the credit man in giving 
credit. 

Furthermore, the industrial character of a community 
has much to do with the probability of success of the 
dealer. If the community is conservative, the likelihood 
of the dealer's being able to pay his debts is much greater 
than if it is not. However, there is much less proba- 
bility of great success in such a community than in 
one of a different type. If the merchant lives in a 
manufacturing city and his customers are to a large ex- 
tent wage-earners, his ability to pay will often depend 
upon the continuous employment of wage-earners. The 
character of the industries of a city with respect to 
furnishing continuous or intermittent employment exer- 
cises much influence upon the dealer's ability to pay, 
and over this influence he has little control. If the 
wage-earner is not furnished continuous employment, he 
cannot pay his store bills regularly. 

If the dealer lives in an agricultural community or 
if he depends directly on agricultural trade, crops and 
prices are important items to be considered. In such 



98 MERCANTILE CREDIT 

places there is always a close association between crops, 
prices, and trade. If crops are poor or prices are low, 
Agricul- *^^ farming trade falls off heavily. This is 
tural con- strikingly true where the dealer does not 
ditions handle the necessaries of life. But whether 
* necessaries or luxuries of life are handled, 
more credit is sought under these conditions than when 
prices are high and crops are good. The general welfare 
of the community has much to do with the character of 
the goods consumed, but this is a problem with which 
the credit man is concerned only in so far as it permits 
him to judge of the purchasing ability of the merchant 
seeking credit. 

The certainty of the ability of the merchant to pay 
is measured, everything else being equal, by the char- 
acter of the customers — whether regular or 
Character transient, whether made up of the wealthy, 
tomers. middle or lower classes. Transient customers 
are more likely to pay cash. However, if 
credit is given, the percentage of loss is greater with 
transient than with regular customers. Losses are 
greater upon the less well-to-do than upon the middle 
and upper classes. All these are factors which the credit 
man takes into consideration in estimating the ability 
of the debtor to meet his obligations. 

The credit man acquires also a knowledge of the char- 
acter of the particular industries seeking credit. He 
must know the capital required for a given business, its 
running expenses, and the line of credit that ought to be 
carried under the given industrial conditions. From 



THE CREDIT MAN 99 

his knowledge of these things he judges of the safety of 
the business which the merchant is conducting. 

One drawback to success is the absence of bookkeep- 
ing and the inadequacy of accounts that merchants keep, 
to show the exact status of their business. 

Many failures can be traced to these causes ^°°^," 

keeping 
alone. Merchants frequently do not know and credit. 

from their books whether their business is 
profitable or unprofitable until it is too late. Good book- 
keeping is, and ought to be, an excellent aid in revealing 
wherein success or failure lies in business methods. 
Failure to keep books hides from the credit man the real 
status of the firms with which he deals. He knows that 
in giving credit the probability of loss to him is greater 
when a merchant does not keep books than when he does. 
On this account the credit man must often discriminate 
against such a merchant. 

As the ideals and moral standards of communities 
differ, credit men must consider the character of com- 
munities. If a great many business men in 
a community have failed, and most of them standards 
dishonestly, it is fair to assume that the moral of the 
tone of such a community from a business commu- 
point of view is not high. Social control 
plays a prominent role. Many dishonest failures are an 
evidence of easy standards of honor. They show that 
the public opinion of the community has been on a plane 
too low to pursue relentlessly those whose business 
morals are low. The record of the merchant and his 
family is a matter of importance. The man who has not 



100 MERCANTILE CREDIT 

failed and whose family record is clear, views with com- 
punctions of conscience the taking of steps which may- 
lead to the bankruptcy court. 

It is not difficult to determine the honesty of a mer- 
chant. The character of his dealings with the house of 

the credit man or with other houses and that 
Honesty ^£ j^j^ dealings in the community in which 
of credit. ^^ lives, reveal his business character. If a 

man has been in business some time, his busi- 
ness morality is well known. If he is a beginner in busi- 
ness it is more difficult to determine what he would do 
under given conditions; but judgment upon his business 
morality is based on his previous record. 

The way in which a man secures his money is also a de- 
termining point in j udging of his ability. If he has earned 

his money it is fair to assume he will conduct 

hT^^^^^H ^ sufficiently conservative business to guard 

credit against losing his capital. The fact that he has 

earned it is itself sufficient to stamp him as a 
man of ability to produce and of some business sagacity. 
It is recognized not only in business, but in everything 
else that the only way to learn to do, is by doing. When 
essentially new problems arise, the chances of doing 
wrong equal, if they do not exceed, those of doing right. 
Nothing insures success in any business better than past 
experience in deaUng with all the problems that are likely 
to arise. 

There are those who seem to think that, for a man 
who has capital to start with, business experience and 
business sagacity are unnecessary for success. To the 



THE CREDIT MAN 101 

prevalence of this theory may be traced a comparatively 
large percentage of failures. Many act upon the as- 
sumption that the business of merchants is simple. 
Although they have failed as traveling salesmen or in 
other fields, they think that if they can get the capital to 
begin with, they can certainly succeed as merchants. 
Credit is given sparingly to such men. Another class 
has made a thorough study of business methods and 
has learned the details of business through experience 
as employees. When men of this class begin business, 
even with borrowed capital, the presumption is favorable 
to success. 

There are thus four classes of men who begin business: 
(1) Those who have earned their capital as employees, 
in which capacity they may learn all the details of the 
business. (2) Those who have learned the business as 
employees, but who begin on borrowed or inherited 
capital. (3) Those who have earned their capital in other 
pursuits, but who bring to the business no experience in 
it, and no knowledge of the business methods which pre- 
vail there. (4) Those who have not earned the capital, 
have no experience in the business, and who know Httle 
or nothing of business methods. Only experience and 
ability to produce entitle a man to credit. The second 
class is probably more likely to receive credit than the 
third. Experience in a business, a knowledge of its 
details, is of more importance to a merchant than hav- 
ing earned capital in other lines. 

After a merchant has been in business for some time 
the conditions under which he started are always con- 



102 MERCANTILE CREDIT 

sidered. However, the credit man has facts more tan- 
gible to act upon. He can judge of the merchant's 
ability as a producer from his sagacity in handling the 
business. The amount of capital in the business, the 
running expenses, the character of the books he keeps, 
and his methods in general, furnish the credit man a 
criterion upon which to act. 

A knowledge of a man's credit standing in his own 
community is very important to the credit man. If a 
Credit debtor can borrow at his bank and can carry 

standing a good Hne of credit, his credit standing is 
in com- certainly good. If he is able to pay his debts, 
mumty. ^^^ -^ j^abitually in debt, and always allows 
his terms of discount to expire before payment is made, 
there is not only a strong evidence of carelessness in busi- 
ness, but also of a lack of business sagacity. When a 
merchant allows terms of discount to expire before pay- 
ment, he is conducting business with capital upon which 
excessive rates of interest are paid, and the business is 
consequently less profitable than it should be. If he 
sells on credit without a careful investigation of the 
standing of his customers and is careless in making col- 
lections, the losses in his business are unnecessarily high. 
His treatment of his customers, his methods of adver- 
tising, the organization of his clerical force, the general 
appearance of his place of business, are all things pointing 
in the direction either of success or of failure. 

The merchant's sagacity as a buyer is something upon 
which credit men are well informed. If he is an easy 
buyer, he will over-buy and have on hand goods which he 



THE CREDIT MAN 103 

cannot sell except at a loss. If he lacks judgment in 
adapting his purchases to the demands of his customers, 
he will always have on hand unsalable stock. 
As said before, merchants are agreed that in ^ 
a large number of cases failures are due to 
having a large supply of unsalable goods. Although job- 
bers will always sell to merchants unsalable goods, the 
weakness of the latter in purchasing is considered a 
reason for discriminations against them in giving credit. 
The conditions under which bank and mercantile 
credit are given are practically identical. In some ways 
the jobber has the advantage of the banker 
in knowing the producing ability of the mer- ^" ^".^ 
chant, an advantage which he gains by his credit, 
opportunity to base his judgments upon the 
character of the merchant's purchases and in his skill in 
bargaining; in other ways he is at a disadvantage. As 
a banker lives in the same community as the merchant, 
he is in a better position than the jobber to know a wider 
range of facts concerning him. Then too, money has 
acquired the right of dictating conditions in bargaining 
not yet attained by merchandise. It is clear why this is 
true. The banker's reputation for conservatism must 
be maintained or the purposes of the institution are de- 
feated. The bank holds in its keeping much of the capi- 
tal of the community, and consequently borrowers are 
wilUng to concede the bankers all precautions necessary 
to safeguard not only themselves but also their customers. 
Bank failures entail a more serious disorganization of 
business than a failure of a jobber or manufacturer. 



104 MERCANTILE CREDIT 

Another difference in the relative power of dictation of 
the banker and jobber is to be found in their competitive 
conditions as bargainers. As a rule the jobber goes to 
the merchant to sell, while the borrower of a bank visits 
the banker. Loans of merchandise are always connected 
with sale. Money loans, upon the contrary, are inde- 
pendent of other transactions. 

Since the right to be inquisitive on standing, character, 
etc., is more clearly conceded to the banking than to the 
commercial houses, it is given to the banks to fix the 
degree of perfection which our credit system attains. 
If they are loose and careless in granting credit, it is 
impossible for the commercial houses to be strict and 
careful. To the banking institutions, then, are given 
the responsibility to a large degree for better customs, a 
better credit system, and better relations between cred- 
itors and debtors. 

Upon receiving orders from a merchant who has had no 
dealing with the house and whose credit standing is un- 
known, the house usually requires a signed 
Value of statement from the merchant. Merchants 
statement, frequently refuse to give signed statements, 
believing that requests for them challenge their 
honor. This feeling, however, is passing away. Mer- 
chants whose credit standing is good are coming to see 
that a refusal to make a statement injures their standing. 
If they can pay cash, a signed statement is unnecessary. 
If they cannot, it is to their interest to have the best 
terms of credit a condition which can be secured only by 
making clear that they will pay their debts. Merchants 



THE CREDIT MAN 105 

are coming to see that their best interests demand a fair 
statement of the conditions of their business, and credit 
men have discovered that the signed statement is the 
most effective means of guarding against losses. 

When the merchant goes into bankruptcy, a signed 
statement in possession of the creditor gives him a de- 
cided advantage. A false statement gives a creditor a 
legal right to bring action to protect his claim either by- 
attaching the property of the bankrupt or of rescinding 
the sale. In the latter case the title to the goods does 
not pass to the debtor, and the creditor has the right to 
recover their value, provided that enough remains in 
stock. To do this it must be proved that the debtor 
knowingly made a false statement without any grounds for 
believing he could pay for the goods. Fraudulent intent 
is the basis of civil action under the national bankruptcy 
law. If the debtor was insolvent at the time the goods 
were purchased and the statement was made, an evidence 
of fraud appears, and the burden of proof is placed upon 
him. As false statements are damaging to debtors, 
statements in the hands of creditors improve their chances 
in collecting bad debts. 

The work of the credit man in investigating the stand- 
ing of merchants is frequently defeated by the failure to 
keep books. If a merchant does not know 
his own financial standing it is impossible ™^^® *° 
for him to give the credit man an accurate books, 
report. However, the demands of the credit 
man for accurate statements are a strong incentive on 
merchants to keep books and to know their financial status. 



106 MERCANTILE CREDIT 

Those who took the census of small manufacturers and 
traders for the United States Census Bureau, learned 
that a great majority of them did not keep books. On 
this account these manufacturers and merchants were 
unable to state the few facts concerning their occupation 
which the United States Government wanted to know 
for its statistical report of 1900. A great many of these 
people did not know the extent of their liabilities or their 
assets, and did not know whether they were conducting 
profitable or unprofitable businesses. 

Some claim that we ought to have a system for verify- 
ing accounts controlled by a public accountant; that 

„ , all dealers should be required to keep books 

Books 1 . • t 

examined ^^ ^^ opened to inspection at least once a 

by public year by accountants appointed by the state or 

account- national governments. Since credit rests on 
ants 

the confidence one man has in another^s ability 

to pay, a good credit system cannot exist without a knowl- 
edge of the debtor's resources and liabilities. If a simple 
and thorough system of accounting could be devised, it 
would be an excellent trade barometer to a business 
house. If such a system were practicable it would relieve 
the credit man from solving many perplexing problems. 

Credit men occupy a unique position in industrial 
society. In the methods employed, they either induce 
Impor- ^ healthy moral tone or else are responsible 
tance of the f or practices which result in, heavy losses, 
work of Merchants who buy on time, and who need 
men. ^^^ ^^ particular in paying when accounts 
are due, are likely to overstock and to buy unsalable 



THE CREDIT MAN 107 

goods. Credit is also granted indiscriminately by them, 
and they are careless in collecting. Here is seen the 
utility of prompt collections. When merchants re- 
ceive credit sparingly and must pay promptly, they 
are careful in granting credit to consumers and are care- 
ful in collecting. The reactions inhibited by promptness 
on the part of credit men are thus wholesome. Looseness 
in giving credit over-gluts markets, while looseness in 
collecting produces habits of indifference and carelessness 
in business which degenerate eventually into business 
immorality. 



CHAPTER VII 

CREDIT OFFICE 

The purpose of the credit office is to procure, organize, 

and classify the right kind of information so as to make 

it immediately available to the credit man. 

Purpose rpj^-g chapter will deal with the mechanics of 

of credit 

office. ^^^ credit office, the sort of filing cases to be 

used and the records to be kept, and also 
with the class of information to be secured, its classifica- 
tion, and its uses. 

The organization of the credit office depends very much 
upon the nature and size of the business, the number 

of credit customers, and somewhat upon the 

•"^^ ° habits and inclinations of the credit man. 
a system. 

The mechanism should not be so extensive 
as to be cumbrous, nor should it be inadequate for the 
purposes of the office. It should provide for such a 
system as will supply the credit man with the informa- 
tion he needs with the least amount of eJBfort. 

For the large offices there have been worked out very 

definite systems which differ somewhat in detail but which 

agree on the general method of recording and 

Y**^ filing information. A typical system is the 

following: A large cabinet is provided for 

filing information in which are placed large envelopes 

vertically, each envelope containing all the information 

108 



CREDIT OFFICE 109 

on each credit case. Each envelope has a number cor- 
responding to the number of the case. A cabinet con- 
taining the regular sized filing cards is also used. The 
cards are arranged alphabetically, each containing the 
name of a credit case, and each bearing a number corres- 
ponding to the number on the envelope in the large 
cabinet. 

The simplicity of the system commends it. When 
some one applies for credit, the alphabetical arrangement 
of the small cards enables the office clerk to turn at 
once to the card bearing the man's name, and the number 
on the card enables him to turn at once to the applicant's 
envelope in the large case which contains all the infor- 
mation possessed by the office on the applicant. This 
method corresponds to those used by charity organiza- 
tion societies, and many business houses, for filing in- 
formation. When a new customer applies for credit his 
name and other data are written on a small card, which 
is placed in the cabinet in its appropriate place. The 
number of the case is written on a large envelope, which 
is intended to contain all the information concerning 
the applicant as soon as it is collected. 

The large envelope usually contains the property 
statement made out by the applicant for credit, the 
information obtained by the traveling salesman, the 
information given by the mercantile agencies, and in- 
formation furnished by references given by the applicant 
and by all others from whom the credit man solicits 
information. A record of the credit given the applicant 
together with all other information concerning the history 



no MERCANTILE CREDIT 

of the business which may be gotten from trade papers 
and a variety of sources is also placed in this envelope. 

The character of the information which should be placed 
on the small card is a mooted question. Much depends 
on the use the credit man desires to make of it. It may be 
used primarily as a reference to more complete information 
in the large filing case; or it may be a complete record 
of information for certain purposes. In the latter case 
it may contain the name, the address, the business, the 
rating, the terms of credit formerly given, and a few of 
the most important facts usually furnished in a property 
statement which should indicate the credit standing of 
the customer. 

Not all credit men keep record cards. If the volume 

of business is large and the number of customers is 

small, no elaborate office machinery is neces- 

sary to follow each case. Again, there may be 
systems c .^ 

^jlggj^ a large number of accounts and a small num- 

ber of individuals to whom sales are made; 
in this case it is necessary to keep but few records. 
But even where there are a large number of sales 
and many customers of a house, the practices of credit 
men differ widely. Perhaps the majority of credit 
men do not use card catalogues at all. Most of them 
have some sort of filing cases or use letter folders where 
they file away the information they have on each 
credit applicant. Again, many credit men look over 
their ledger accounts of the candidate before passing 
judgment upon a request for credit. However, in an 
office where a great amount of business is transacted, 



CREDIT OFFICE 111 

everything favors the use of card catalogues and filing 
cases as a means of saving the time and energy of the 
credit man, and of permitting him to give accurate judg- 
ments without delay on applications for credit. If the 
credit office is to have its greatest utility, the records 
must be kept up-to-date, and this will require consider- 
able activity from some member of the credit office 
staff. 

The committee on Credit Department methods of the 
National Association of Credit Men has been laboring 
for a number of years to get out suitable 

property blank forms. Blank forms to be pr^^it 

inquiry 
used by salesmen in obtaining information forms. 

from customers, attorney's report blanks, and 
blank forms to be sent to persons given as reference by 
applicants for credit have been devised. A great variety 
of blank forms is used for all these purposes. It was the 
intention, however, of the above-named committee, after 
receiving suggestions from many sources, to devise such 
an inquiry form for each purpose as would enable the 
credit man to obtain all the information desired with as 
little annoyance and inconvenience as possible to the one 
called on to make a report. These forms have been re- 
vised frequently and have been submitted from year to 
year to the National Association. As they represent the 
best judgment of credit men for the purposes for which 
they were intended, they will receive consideration in 
this discussion. 

A property statement is one usually made by an appli- 
cant for credit over his own signature showing the nature 



112 MERCANTILE CREDIT 

and kind of property he possesses, his assets, liabilities, 

etc. The property statement is considered valuable as 

a basis for credit for two reasons: 1. no one 

property ^^ ^^ familiar with the financial status of the 
statement. 

applicant for credit, his assets and liabilities, 

as he himself is, and no one has the same right as he has 
to give such a statement; 2. a signed statement which 
misrepresents the facts pertaining to the possessions of the 
applicant and his financial status, makes him criminally 
liable for obtaining goods under false pretenses if he fails 
to pay his debts. A great deal of effort has been made in 
recent years to make it customary for the seller of goods 
to demand as a right a signed statement from the appli- 
cant for credit. The latter often has some one else in the 
office sign the property statement, but in some states 
the man who fails to pay his debts cannot be held crim- 
inally liable for a false statement of his property which 
he did not sign personally. 

The blank form for a property statement is very desira- 
ble in order that the right kind of information may be se- 
cured. Otherwise, the applicant for credit makes such a 
statement as suits his purpose. With a blank form before 
him, a refusal to sign all questions makes it embarrassing 
for the buyer, as any omission gives the credit man a 
right to inquire why the desired information was 
withheld. 

Form I gives the property statement form recom- 
mended by the Committee on Credit Office Methods of 
the National Association of Credit Men. All property 
statements contain the same essential elements. This 



CREDIT OFFICE 113 

form calls for a more detailed report of the finances of 
the applicant for credit than most property forms. 

The two chief divisions of the report are the active 
business assets and the business liabilities. Under the 
former head are included the value of the 
merchandise, the notes and accounts due the - ^^^® ^ 
business concern, its cash in hand and in 
bank, and the value of its fixtures, machinery, etc. 
Under the head of business liabilities are included what 
is owed for merchandise, what is owed in hand, what 
is owed others for borrowed money, and what is owed for 
taxes, rent, and on mortgages, for fixtures, etc. Other 
assets included in the report are the real estate free from 
encumbrances, personal property, etc. An opportunity 
is then given the applicant for credit to state the grand 
total net worth of his business. 

It remains then for the credit man to make proper 
deductions from the notes and accounts receivable and 
also from the inventory of the merchandise and other cap- 
ital. In considering the inventory the items should be 
valued at cost, because the prospective selling value is 
always an unfair estimate for an inventory. If the 
fixed property, including buildings, furniture, fixtures, 
etc., has depreciated in value, the inventory should show 
the true selling value of such property. It will be 
shown hereafter how other phases of the property state- 
ment guide the credit man in judging the value of the 
inventory. 

Much depends on the character of the assets of the 
company seeking credit, because the character of its 



To RICH. MANN 4 CO., New York 

For the purpose of obtainfng credit for goods to be sold me or as by you. or for any 
extension granted me or us on my or our acc»ant with you, the following is given you sls* 
true statemept of my or our assets and liabilities and general financial condition. I or we 
agree to and will notify you immediately in writing or any materially unfavorable change 
In my or our financial condition, and in the absence of such notice, or of a new and full 
written statement, this may be considered as a continuing statement and substantially 
correct 



Firm name. 
Town 



.Date. 



.191 — 



.County- 



.State- 



ACTIVE BUSINESS ASSETS 
Value of merchandise on hand at coRt_____ 
Notes and accounts, cash value 
Cash in hand 
Cash in bank 



Fixtures, machinery, horses and wagons- 
Total Active Business Assets _ 



BUtlNESt UABIUTIES. 

Owe for mdse., open acct 
of which $■ , is past due 
Owe on notes for mdse. — — . 
Owe bank 



Owe others for bor'd money 
Owe taxes and rent 



Mtges.on fixtures, machin'y, 
horses and wagons 



Total Business Liabilities. 



Net Worth in Business. 



OUTSIDE ASSETS. 
Total real estate, assessed valuation, $. 
Total enctimbrances n , .$- 



Dollara 


Cenu || 
















































































=j 


1 














J 



IM I I I I 



Mill 



Elquity 



Personal property- 
Other asseta 



Grand Total net worth in and out of Business. 



Please state location and description of each parcel of real estate, and cash valuation 
of, and encumbrances on each, and in whose name each parcel is h°H 



FORM I. 

Property statement for use by partnerships. 

114 



Wb&t portion of real estate described is bomestead. 
Have you any other debts than herein mentioned?.— 



Pali srlven and surname of each partner 



Age ; Married t 



Possible tiaoiliiy oi cacJj 

raetnber ot firm as 
indorser, boodsuiati, etc 



What kind of business do you conduct ?- 
Insurance on stock. 



On fixtures, machinery, horsts and wagons 



On real estate. 



Amount of sales last year- 



Amount of cxpen^ses 



last year. 



What proportion of your sales is on credit ?- 



Date of last inventory. 



. Have you any judgments, judgment 

notes, chattel mortgages, or other liens against you, Recorded oi unrecorded ? If so, descrilie 



. . ■ If you have pledged or transferred outstanding accounts or properly 
remaining under your control, state amount thereof and anjount received, or to bo received 

on accouAt of such pledge or transfer 

What books of account do you keep? , , , . . . . , , ,. 



Buy principally from following firms i 


Kam* 


Address 


What line of 
business/ 













































The above statement, both printed and written, has been carefully 
read by the undersijfaed, and is a full and correct statement of my or our 
financial condition as of 191 .». 



Firm signature^ 
By whom signed . 



. a member of the firm 



All questiont must be ansv«red. Insert ciphers in absence of any amount. When the 
" will correctly answer the questions, write them in their 



words "Yes/* "No 
I)rop«r{daces. 



or " None ' 



FORM I.— (Continued.) 



115 



116 MERCANTILE CREDIT 

assets determines in large measure its paying ability. 
If the seeker for credit is overstocked, as a rule he will 
be slow in making his payments. If a con- 
Character siderable portion of the capital of the trader 
of assets 
important, which should be invested in the business is 

invested in outside interests, as real estate, 
stocks, etc., these investments should be very care- 
fully examined by the credit man, as they may be of 
vital concern in determining whether the applicant for 
credit is worthy of it or not. It is generally conceded 
that credit men do not give sufficient attention to the 
assets of concerns seeking credit. 

For convenience in determining the credit worth of can- 
didates assets should be divided into two classes: live or 
quick assets, and slow or fixed assets. "The 
Live and £j.g^ ^^q,^^ consists of that character of property 

slow . . £r jr ^ 

assets. ^^^ which there is a steady demand, or for 
which under all ordinary circumstances there 
is a ready market; or property which can be converted 
into money or utilized for credit purposes on short notice. 
Such assets are represented by cash, marketable mer- 
chandise, good book accounts, securities, and any other 
character of personal property subject to expeditious sale. 
Slow or fixed assets are those for which there is not a 
ready sale, especially such property as is not of constant 
utilization in the course of business. They consist of 
furniture and store fixtures, buildings, real estate and 
machinery, and investments which are of a developmen- 
tal or speculative nature."^ 

* Prendergast : Funds and Their Uses, p. 228. 



CREDIT OFFICE 117 

While credit men are agreed on the distinction between 
the two classes of assets, much difference of opinion 
exists among them with reference to the value of slow 
or fixed assets in estimating a credit risk. Some are 
inclined to consider them of no value whatever, while 
others would discount them heavily in estimating their 
value as a basis for credit. Still others consider that 
they have merit chiefly in case of a failing concern, 
as they materially assist, under such circumstances, in 
liquidating. Much, too, depends upon the character 
of the business conducted, and the general condition of 
industrial prosperity. If the business often needs capital 
on short notice, large investments in fixed capital are 
a disadvantage. In periods of depression it is difficult 
to dispose of fixed capital, while in periods of prosperity 
certain classes of fixed capital may be sold on short 
notice at good values. Everything, however, depends 
upon the proportion of slow to fixed assets, the nature 
of the business, the condition of prosperity, etc. 

In property statement form (I) are many questions 
which when they can be correctly answered result 
in throwing much light on the nature of the assets of the 
credit applicant and his worth as a credit customer. 
It is important to know what portion of the real estate 
described is the homestead on account of the importance 
of the homestead laws of the various states. 

One question calls for a knowledge of the insurance 

on stock, buildings, machinery, fixtures, . 

. Insurance, 

etc. The amount of insurance held is very 

important in determining a credit risk. A business man 



118 MERCANTILE CREDIT 

may be perfectly solvent and doing a very profitable 
business and from every other point of view a good 
credit risk, but if he does not carry insurance on his build- 
ings and his merchandise, he may be rendered unable to 
pay his debts in a very brief space of time by a fire. It is 
on this account that the property statement calls for a re- 
port on the insurance on goods, on buildings, etc. This 
feature is so important that no good credit man to-day 
would think of granting credit without a full knowledge 
of the insurance carried by the credit applicant. 

The credit man should know in what company the 
property is insured and whether the insurance company is 
solvent or insolvent. He should also know the value of 
the goods carried by the merchant and whether this prop- 
erty as well as his buildings and other property are ade- 
quately covered by insurance. Some concerns require 
that their traveling salesmen obtain this information from 
customers when credit is requested, and practically all 
the property statement forms at present request this 
class of information. 

The subject is deemed of sufficient importance by the 
National Association of Credit Men to have a standing 
committee on Fire Insurance. This committee has done 
efficient service in urging credit men to require merchants 
who desire credit to be adequately insured, and in 
securing where possible, better rates from fire insurance 
companies and in bringing pressure to bear to have 
merchants and communities take such precautionary 
measures as will secure to them better rates from insur- 
ance companies. 



CREDIT OFFICE 119 

The property statement also calls for the date of the 
last inventory and some of them for the frequency of 
taking inventories. This is important to the 
credit man as he should know how often the 
applicant for credit estimates the value of his property. 
Moreover, as his report must be based on the last inven- 
tory taken, it is important to know when the values 
were placed on his property. It is further required that 
the applicant for credit state if there are any judgments, 
judgment notes, chattel mortgages, or other loans against 
him; also if he has "pledged or transferred outstanding 
accounts or property remaining under his control. '* 

The property statement blanks made out by the 
National Association of Credit Men require the applicant 
for credit to state what books of account he 
keeps. This is important for various reasons. b k 
Failure to keep proper books of account is re- 
sponsible for a great many failures, and when the credit 
man is asked to give credit he should know if the appli- 
cant for credit keeps books and what kind of books he 
keeps. This question is now of great importance on 
account of its relation to the National Bankruptcy Act, 
as under the Act a failure to keep proper books is an 
assigned reason for refusing a discharge to a debtor. 
Legislation in New York makes it an evidence of fraud 
if the debtor who has received credit upon the representa- 
tion that he keeps books fails to submit his books within 
ten days after a requisition has been made upon him by 
a creditor whom he has failed to pay. 

The property blanks of the credit department methods 



To RICH, MANN A CO., New Yorfc 

For the purpose of obtaining credit now and hereafter for goods purchased, wo here- 
with submit to you the following statement of our resources and liabilities, and will im- 
mediately notify you of any material change in our finandal condition. 

In consideration of your granting credit to the undersigned, we agree that in case o£ 
Gtir failure or insolvency, or in case we shall make any assignment for the benefit of credit- 
ors, bill of sale, mortgage, 6r other transfer of our property, or shall have our stock or 
plant attached, receiver appointed, or should any judgment be entered against us, then all 
and every of the claims which you have against us shall at your option become immediately 
due and payable, even though the term of credit has not expired- All goods hereafter 
purchased from you shall be taken to be purchased subject to the foregoing conditions as 
a part of the terms of sale. 



Corporation style. 
City 



County. 



.State. 



' BUSINESS ASSETS 
Valne of Merchandise on hand at f^"*- 
If manufacturing, raw material, $ . finished, $. 

unfinished, $ ,. . 



Notes and accounts, cash value- 
Cash in hand 

Cash in bank 



Bills or accounts receivable, due from officers. 
Patents and patterns 
Fixtures and machinery 



Total real estate, cash value .. . $- 
Total encumbrances on real estate, $- 



Total Active Business Assetsu 



Equity- 



II Dollars 


Cents 1 


: 


— 


— 


"~~ 


~~ 


■~~" 




•""• 


— 


— 


__ 


— 


— 


— 


— 


— 






— 


— 


— 






" 


' 





































IU8IHE88 LIABILrriES. 

Owe for mdse., open acct, 

of which $ is past due 

Owe for notes for mdse— . 

Owe banks ■ ,,.,,,. 

Owe for bills for paper sold 
Owe others for bor'd money 

Owe taxes and tent 

Mtgs. on fixt's and mach'y 







DoUars 






Cents 




— 




— 


— 





— 


— 


— 




— 


— 


— 


— 


— 




— 


— 




— 


— 


— 




— 


— 


— 


— 










_ 













Total Business Liabilities- 
Total net worth ., 



I M } I I 



I I .1 I I 



Please state location and description of each parcel of real estate, and cash valuation 
of, and encumbrances on, each — , , , , . ■ . .i ■ .1.. 



FORM II. 
Property statement for use by corporati< 
120 



r Acconunodation indorsements. 
Contingent Liability < 



Uadorsed bills receivable and ootstanding. 



OFFICERS. 



AiSdreM 



President - 
Vice-Prest- 
Secretary . 
! Treasurer - 



DIRECTORS. 



Authorized capital- 
How paid in: Cash, $. 



Subscribed 



Paid in. 



Other property- 



Description of 



other property, and how valued- 



laws or special act ?- 
Date of charter?...^ 



In whose name is title to real estate held ? 

Jncorpojrated in what State and tinder what general 
_— _i Nature of business ? 



.Suits pending, and of what nature?. 



Are any merchandise creditors secured in any 



way 



Amount of annual business. 



Annual expenses. 



Annual dividends. 



When was last dividend declared ?- 



Insurance carried on merchandise ■ . 

Real estate ■ Regular time of taking inventory, 
bank accounts with 



Rate. 
Fixtuttes and machinery- 



Keep 



Keep following books of account - 



If you have pledged or transferred outstanding accounts or property remaining under 
your control, state amount thereof and amount received, or to be received, on account of 
such pledge or trancf^r 



Buy principally from following firms : 




Nam* 


Address 


What Hno of 
business? 



























The above statement, both printed and written, has been carefully read by the 
undersigned, and is d full and correct statement of our financial condition as of 



Corporation Signature- 
By 



Date. 



All questions must be answered, insert ciphers in absence of any amount When the 
words "Yes," " No" or "None" will correctly answer the questions, write them in their 
proper places. 

FORM 11.— (Continued.) 



121 



122 MERCANTILE CREDIT 

committee of the National Association of Credit Men 
require the signature of a member of the firm seeking 
credit in the name of the firm imder the following affir- 
mation: '* The above statement both printed and written, 
has been carefully read by the undersigned, and is a full 
and correct statement of my or our financial condition." 
Property statement Form II is devised for use by corpora- 
tions and is intended to procure practically the same 
class of information as is to be secured by Form I. 

The credit man of any well-regulated office will not 

content himself with obtaining information from a single 

source but will collect information on credit 

rave ng applicants wherever it is available. The 
salesman. ^ ^ 

traveling salesman as a source of credit in- 
formation will be discussed later. In order to secure the 
credit information desirable or possible for him to obtain, 
blank inquiry forms have been made out of which Form 
III is a sample. These blanks especially are relatively 
brief. They require the salesman to ask the buyer a 
number of questions and other portions of the blank can 
be filled out by the salesman himself. These blanks can 
be filled out quickly by the salesman, and it will at once 
occur to the reader which questions the salesman can 
answer upon observation and which he must ask the 
purchaser. 

Attorneys residing in the locality of the credit applicant 
have always been a source of credit information. The 

work of the attorney enables him to possess 

^ a great deal of information of interest to the 

attorneys. ^ 

credit man. Special credit inquiry forms are 



CREDIT OFFICE 



123 



T?ie CaiT^pbeTT Iron Co. 

New Customer Report. 

To be 611eA oat and sent in with each new castomer's ortler, or change of Erra. Do this to hetp ns nak« 
prompt ziiipuents. 



Address . 
R. F. D.. 



(Give N.unrs in (ult) 



it Firm, or Officers if Corporation. 
AGE (about) MARRIED. 



V. CKvns shop worth about _ 



S. Owns home wwth about. 



S. Encumbrances on abovo..^ 

*. Stock worth about _^__ 

e/ Kind o( «-«i»«~t 

«. Does owner devote aD his I 



'. to this business ?_ 



7. What ts local Standing? 

B. Has he jood ability ? 

*. Does he drink or cambU 

10. Has heen deahng with - 



It. Is location good ? 

14. Does he get good profits ?. 
I*, fianksw'ith 



18. local crop prbspects. 
IT. Is customer colored >_ 



18. IHmvtnngtnTiii»in><«> y.„. 

n. What is yoor opinion of customer r ( Answer pntcveise aide. J 



FORM III. 
Property statement form for use by salesmen. 



124 MERCANTILE CREDIT 



Sub. Na I00>522 DETACH AND SEND REPORT BELOW TO titkts Sept 1, 1913 

ART BRASS COMPANY, 

299 E. 1 34lh Strett NEW YORK. 



»h,cnUi to THE MARTINDALE SERVICE u«] .bo., iu^ ml M^ed I. i 




ATTORNEY UlU. PLEASE DETACH. HEAD AND FILE TV.S STUB. AND NOT CHVULCE NAME OF INQUIRER 

Confidential "Form A" 

T« WtttBon. Stouffer A DavU, , New Vorfc. March 4,1913. |q 

A-^..»— «w*. M-^s™. *.!>,„ 5«-t—M-*—.A«. C«pifesSept 1.1913 

At M»» rirat K«tta«yl B.nt Bide., Celumbuc, Ohio. 

Dear Sr: — Kindly fa»or in with u lull * nixxt'u poeaUe s{ the party, of finn. named below, which we ckdge y<m w« 
wil trul in ihe stricini confidence. MaS to lu in endoaed tUop^.tutelope. We wil gladly reapfocale your hndnna wW*' 
e.o OHMTluoay occuri. A prompt reply wfl be duly appfeciaied. SlAsoibcr'S Na 100.522 

Name — ..,,.. 

Addren — ■ ■ _ __ 



2. Full individual namei > 

J How long m busness ' — ^ — 

4. HabiO and biuineu ^ilily ? . Inclined lo ipeculale '- 

5. Estmulcd value o< Hock > 



6 Repute ai to pro«iptneia> 

7. Any home debu owag > Any dauiii in altof ney i hands > 

6. Etct sued f — ^ . It to. give pamculaia P . 

9. Ever Jailed' II ». give paitKuUrt? 

10 Netuneacumbered valne o( real eilaie' ^^-^^^^_— — — — _^^^^^_— .^_— 

1 1. Any tesourcet outade ol business ? 

12.. What n your idea ol eel worth > 



1 1 Cettrng ahead > Holding own > Gomg behind } . 

Other in 



FORM IV. 
Business statement form for use by attorneys. 



CREDIT OFFICE 125 

manufactured for use by attorneys, of which form (IV) 
is a sample. It is the custom in some places to mail with 
the credit inquiry form a check for one dollar, which is 
considered a fair compensation to an attorney for the 
service he renders.^ 

It is a common practice for new applicants for credit 
to give references to business men with whom they have 
had dealings. In the absence of special forms 
for this purpose the information solicited by the 
credit man varies greatly, is usually brief, and 
is likely to contain little of value. To suit this need 
Form V was adopted and recommended by the National 
Association of Credit Men. It is brief and self- 
explanatory. 

The following is a typical method of procedure of the 
best credit offices in the opening up of new accounts. 
With his order for goods from a new customer, the sales- 
man is required to send in his credit report of the cus- 
tomer. If the order is for immediate shipment and the 
salesman's credit report is complete and satisfactory, the 
goods will be shipped at once, and then a fuller report on 
the credit risk is obtained for future use. If the order is 
for shipment in the future or if the credit report of the 
salesman is unsatisfactory, a further investigation of 
the credit standing of the buyer is made at once. The 
standing of the credit applicant is investigated first in 
the reports of Dun and Bradstreet. If these are inade- 
quate or unsatisfactory, special reports are requested 

* This subject will be more fully discussed under the head of 
Sources of Credit Information. 



126 



MERCANTILE CREDIT 



RETURN THIS TO US 

St Uuls, 



Messrs. 



Kindly give us below YOUR EXPERIENCE with 

Name -, ^ 

P. a , . ■ . .. — .-^ , - 



. am CONSIDCMSO •trictlt confipkntiai. 

Yours truly. 



600D FORM & CO. 



McMBCR* National AsaeciATioN or CueoiT Men 



Sold Since. 



4 f^ - •, 



Terms. 



Highest Recent Credit % 
Owing Now 



( On Open A 

•I 



( On Notes, 
\ On Open A' 
On Notes, 
First Order, $ . 



Past Due 



■i: 



Other Information. 




Thit form can be obtained only from 
"National AModation of Credit Men, 



.41_PjRtkJRow* 
at the following prices: 



-$sm 



MANNER OF PAYMENT 



Prompt uid Mtiafaotorr 
Slow bat oonsidered good 
Slow ukI onaatirfsctory 
Pars C. O. D. 
Sell for Msh only 



Aeoonnt eloaed for on 
Make* onjiut elouna 
CoOeeted hj attorney 



FORM V. 

Business statement form to be used by those given as references 
and others who have had business relations with credit applicant. 



CREDIT OFFICE 127 

from either or both of these agencies. The credit report 
of the salesman should always contain a list of references 
given by the buyer. These are written to at once. Using 
blank forms similar to Form IV the office writes to an 
attorney in the town where the credit applicant con- 
ducts his business and also to an attorney in a town 
where he formerly conducted a business. A banker of 
the community of the buyer's place of business may also 
be written to with reference to the prospective customer. 
From these various statements and from the property 
statement obtained from the credit applicant prior to the 
shipment of goods or after they are shipped, the credit 
man determines whether credit shall be given and if so 
what the amount of the credit shall be. These reports 
are then all filed away in the large envelope used by 
the credit man for information concerning his credit 
customers. 

Another document of value to the credit man in grant- 
ing credit is the comparative property statement form. 

The larger mercantile houses and banking _ 

Compara- 
institutions appreciate the value of the com- ^^^ 

parative statement form. Well - organized property 
credit offices require a property statement statement 
once a year from those who receive credit 
from them, and when occasion warrants it, more fre- 
quently. The comparative statement form is a large 
sheet in which is placed in a single column the essen- 
tial facts from a property statement giving the finan- 
cial standing of the applicant for credit. As the num- 
ber of columns corresponds to the number of years 



128 MERCANTILE CREDIT 

for which a comparison of standing is desirable, it is 
possible for the credit man to prepare a comparative 
statement form covering any number of years. 

Where comparative statement forms are kept it is 
necessary for the credit office to have one comparative 
statement for each customer. The information from the 
property statement is usually copied by some one in the 
office. 

Banks were the first to use the comparative statement 
forms, and they are used to-day by them to a much greater 
extent than by mercantile houses. This is perhaps due 
to the fact that credit customers of banks are more will- 
ing to submit property statements than are customers 
of mercantile houses, and the property statement fur- 
nished the bank conforms more to a standard type 
than those submitted to mercantile houses. The latter 
have only recently acquired the privilege of receiving 
property statements from their credit customers, and 
consequently the dates for comparative statements have 
been received only recently by merchants. 

In the absence of a comparative statement the credit 
man usually compares the recent property statement 
with those of previous years. The comparative state- 
ment is valuable to him because at a glance he can com- 
pare the various elements over a series of years upon 
which a credit risk depends. 

Credit Banks and mercantile houses have for a 

lines or number of years been granting to their credit 

limita- customers, credit lines or limitations. These 

credit lines or limitations are the maximum 



CREDIT OFFICE 129 

amounts which a banking or mercantile house will loan 
to a customer at any time. These lines are determined 
upon by credit men after a thorough canvass of the 
value of a customer as a credit risk. 

When a credit line is determined upon, the policy of 
mercantile houses differs widely with reference to it. 
Some treat it as a danger signal and act accordingly. 
In some cases where the credit line is determined upon 
the bookkeeper alone passes on accounts only to see 
that loans are within the prescribed limits. In the 
great majority of cases, however, all loans within the 
credit limits receive the attention of the credit man, 
and to many it is deemed highly expedient that they 
should receive his consideration. The credit line should 
be considered a fixed or a permanent matter. It is sub- 
ject to change, however, with changing conditions and 
circumstances, and if the credit man would fix these lines 
wisely, he must know about the purchases of each credit 
customer, the time allowed him for his payments, and 
his promptness in paying his bills. 

Credit lines have not been standardized. What is 
allowed a customer depends somewhat on the whim of 
the credit man. So many factors enter into a credit 
risk that no definite rules have ever been evolved that 
will enable credit men to act with system in determining 
what credit should be granted. The conditions differ 
so widely in the sale of different classes of goods that 
rules which would guide credit men in granting credit to 
grocers might be very unsafe to hardware men. As a 
rule, lines of credit can be granted for larger amounts 



130 MERCANTILE CREDIT 

where the terms of credit are for brief periods and where 
the goods are turned many times a year, than where the 
credit terms are long and where the stock of goods is 
turned infrequently. 

When credit hmits are fixed they are changed fre- 
quently or are not respected. The circumstances change 
so often that credit may be given to one customer far in 
excess of the credit limit, while another customer may 
be denied a loan up to the credit limit. The factors con- 
sidered have to do with the extent to which the credit 
applicant is a customer of the house granting credit, with 
the terms of credit he desires, his promptness in paying, 
crop conditions, labor conditions, condition of prosperity, 
condition of competition where he conducts his business, 
opportunities for the business where he is located, and 
with the degree of prosperity of his business. An in- 
crease or a decrease of the credit risk, and a regard for 
the credit limit granted to a specific customer depend 
upon the above-named factors. Although subject to 
change, credit limits serve a useful purpose in controlling 
the policy of the credit man within certain limits. 

Banking institutions are now establishing credit de- 
partments with credit men in charge. Some banks in 
our large cities have had such departments for 
Credit de- jj^^j^y years; but it has only been within the 
partments , ^- ^^ i 

of banks. ^^^^ fifteen years that the credit department 

has been considered an essential feature in 
large commercial banks. Where such departments do 
not exist, the work of a credit department is handled by 
officers of a bank in connection with their other duties. 



CREDIT OFFICE 131 

This is especially the case with the smaller banks of the 
country, and it is not at all likely that the smaller banks 
will ever find it profitable to organize an independent 
credit department. 

In the interests of good banking there are many reasons 
for the organization of good credit departments: 1, 
Where loans are made by one or two officers of 
a bank, who use no system but retain valuable jj^^j^g 
information in mind, this knowledge may be should 
lost to the bank if the officer who has charge of ^^^® 
credits dies or resigns. With a credit depart- ^^^ ^ ^" 
ment and a credit system this information is 
preserved. 2. The profits of a bank are determined by 
the wisdom of its investments, and these are made at 
greatest advantage where those in charge of the invest- 
ments have full knowledge of credit risks. 3. Large 
banks have also the responsibility of advising country 
banks which deal with them with reference to the value 
of commercial paper which they buy and other invest- 
ments which they make. They are also called on 
frequently by their customers, their depositors, to 
give advice on investments. Ability to guide others 
safely requires not only a thorough knowledge of in- 
vestment conditions, but a suitable system to preserve 
this knowledge. 

The credit department of banks is not so well es- 
tablished as the credit department of mercantile and 
manufacturing houses, but where such a department 
is established in large commercial banks, the work is as 
thoroughly differentiated and organized as in the credit 



132 MERCANTILE CREDIT 

departments of either mercantile or manufacturing 
establishments. 

Most banks with credit departments demand a prop- 
erty statement from prospective borrowers. The en- 
dorsement by the American Banker's Association and 
Association of State Bankers of the policy of requiring a 
property statement gave a sanction to this policy which 
many of the banks both within and without these asso- 
ciations had the wisdom to accept. The method of 
obtaining a property statement ordinarily differs from 
the method employed by the credit department in a 
mercantile establishment. When a new candidate seeks 
credit in a bank, he is usually turned over to the credit 
man who, using a blank form, obtains answers from the 
applicant regarding his financial condition and his reasons 
for credit, etc., and then obtains his signature to his re- 
port. He usually is requested to call later for an answer. 
In the meantime the credit man learns what he can of the 
applicant personally, his business history, his business 
ability, his reputation in his community for honesty, 
etc., his habits and his moral character, and then gives or 
withholds credit depending upon what he learns. 

The credit departments also obtain information on 
specially prepared blanks from other banks with whom 
the customer has dealings, from references given by the 
applicant for credit, from other business houses which 
have a knowledge of the credit standing of the candidate, 
and from mercantile agencies like those of Bradstreet and 
Dun. These credit departments often obtain property 
statements once a year showing the financial condition of 



CREDIT OFFICE 133 

their borrowers. These are tabulated and comparative 
statements are made out covering several years. One 
question found in some of the property statements ask- 
ing how often the accounts of the concern are audited 
and when they were audited the last time, is especially 
significant. 



CHAPTER VIII 

SOURCES OF CREDIT INFORMATION 

MERCANTILE AGENCIES 

The mercantile agency is an institution organized to 
investigate the financial standing, the business char- 
acter, and habits of business men. To put 
wnat the ^j^^ matter briefly, it is a credit information 
does. bureau. There are two classes of agencies, 

the general agency and the special agency. 
Of the first class, the two conspicuous examples are 
the Bradstreet and Dun agencies. The special agency 
obtains credit information in a special line of business, 
as furniture, shoes, coal, etc. Because it specializes, it is 
more eflacient than the general agency in procuring and 
distributing information of a detailed character. 

The agency will be discussed here from three points 
of view: 

1. The economic conditions which gave rise to it, 
and its development to meet the needs peculiar to the 
United States. 

2. The methods of the agency — its organization to 
procure and distribute credit information. 

3. The utility of the agency to the business world. 
The mercantile agency did not exist before the crisis 

of 1837. The industrial area of the United States at 

134 



SOURCES OF CREDIT INFORMATION 135 

that time did not extend far into the West. Cincinnati 
was then the great western city of trade with a popula- 
tion in 1840 of 46,000. Chicago and St. 
Louis were small trading ports, the former conditions 
having a population of 4,470, and the latter responsi- 
of 16,469. Prior to the crisis of 1837, the We for the 
western and southern traders visited the job- 
bers and manufacturers of the East twice a year to make 
their purchases. After the seller had a few minutes' 
talk with a merchant, terms of credit were agreed upon 
which usually required payment for the goods upon the 
return of the merchant when he purchased again. The 
relations between the jobber and the western retailer, 
between seller and buyer, were personal ones. Credit was 
granted because the jobber had confidence in the honesty 
of the trader and in his ability to conduct a successful 
business. When a merchant started in business, if 
credit was desired, he took letters of recommendation from 
his fellow merchants to their jobbers in the eastern 
trading centers. If retailers lived remote from jobbing 
centers, their purchases were restricted to the few job- 
bers with whom they had established personal relations. 
While the traders of the South and West continued to 
visit the jobbers of the East, the relations between the 
buyer and seller were very different from 
those we understand today to be purely relations 
business ones. The trips of the retailers to between 
the houses in the cities were not only for ^^7^^ and 
business but for pleasure. When trade rela- 
tions were established between the jobber and the re- 



136 MERCANTILE CREDIT 

tailer, the personal relations between them became of 
such a character that the retailer usually purchased ex- 
clusively of the jobber. The standards of business and 
personal honor then demanded fairness in prices and in 
quality of goods on the part of the jobber, and prompt- 
ness in paying his debts as contracted on the part of 
the retailer. An element of shrewdness and a power 
of personal control were acquired by the city merchant 
in those days which the changed methods of buying and 
selling have made unnecessary now. 

Nearly all the states and territories had insolvency 
and collection laws, but they were rarely enforced, as 
eastern merchants seldom attempted to pros- 
Insol- ecute bankrupts in the West and South, 

vency and -^^^^^ merchants, even as late as the '40's, 
laws of claimed that it would be better if all the 
states. collection laws of the states and territories 

were abolished, as higher standards of honesty 
and honor would be developed Tvdthout them. 

These earlier notions gradually changed. The jobber 

had but little definite information as to the standing of 

^ .. , those to whom he granted credit, and he 

Failure of 

g^jy frequently discovered that his confidence had 

methods been misplaced. Especially during times of 

of granting panics and depressions, he lost heavily by 

injudiciously granting credit. Some of the 

larger jobbing houses that could afford to do so sent out 

agents among their customers to make collections and 

to investigate their standing and the character of their 

buiness. The means of travel were slow and difficult, 



SOURCES OF CREDIT INFORMATION 137 

and this method of learning the status of those seeking 
credit proved to be very expensive. At least all the small 
jobbing houses were denied this means of investigation. 
Such credit relations prevailed exclusively among busi- 
ness men to the close of the crisis of 1837. After the 
crisis had spent its force, and thousands of merchants had 
been retired from business, the granting of credit with 
little or no knowledge of the standing of those seeking 
it became a very serious problem to both the jobber and 
manufacturer. Then, too, as business relations began 
to extend over a larger area, a greater need was felt for 
information concerning the business standing of men 
continually seeking credit, which could be procured 
nowhere but in the home of the merchant. It was at 
this time and under such conditions that the mercantile 
agency arose. 

The rise of the mercantile credit agency may be traced 
to the eagerness with which information kept by the credit 
man of a large jobbing house of New York 
was sought for by sellers. The credit man 9'^^^^*' 
recorded in a book all the information he agencies, 
could collect over a series of years concerning 
the traders with the house. The house failed, but the 
information was preserved. Other houses knowing 
this sought out the credit man to get his informa- 
tion. He began to sell it, and in this act of his we 
have the origin of the first mercantile agency. Tap- 
pan & Co. was organized in 1841. In 1846 Benjamin 
Douglas was admitted to the company as a partner of 
Tappan. In 1854 Graham Dun became a partner of 



138 MERCANTILE CREDIT 

Douglas and the firm name was Douglas & Company. 
In 1860 Douglas withdrew, and since then the business 
has been conducted under the name of R. G. Dun & Co. 
The Bradstreet Company, the other leading agency, was 
organized in 1849. Mr. John M. Bradstreet, a lawyer 
of Cincinnati, had charge of a large insolvent estate and 
learned by this means a great deal of credit information 
concerning people in and near Cincinnati. He made 
arrangements with several New York houses which en- 
abled him to sell his credit information to them. This 
led him to organize an institution which dealt exclusively 
in credit information. He was soon joined in the busi- 
ness by his son, and the name was changed. The more 
recent change of title was in 1876, when the firm was in- 
corporated as the " Bradstreet Company." Other general 
agencies for a time attempted to compete with the Brad- 
street and Dun companies, but they failed, and now these 
two companies have practically a monopoly of the gen- 
eral agency business. 

The agency was organized at first primarily in the 
interest of the jobber. Customers from different states 
and territories came to him seeking credit. 
Develop- There was great need for information on the 
agencies, changing conditions of the dealers. As job- 
bing houses were established in western centers, 
branch offices were opened to collect and disseminate 
information. By 1850, besides the offices at New York, 
Boston, and Baltimore, western offices had been estab- 
lished at Cincinnati, Louisville, and St. Louis. By 1857, 
seventeen offices, besides the central one in New York, had 



SOURCES OF CREDIT INFORMATION 139 

opened in trading centers. Each office was supported 
by the trading community of which it was the center. 
The office in Boston had charge of the trading community 
of New England, the one in Charleston the community 
of South Carolina and Georgia, while the Ohio Valley 
was divided between the offices at Pittsburg, Cincinnati, 
and Louisville. All the branch offices were under the 
control of the central office in New York, and they were 
all governed by uniform rules. 

It could not be expected that an institution which 
encroached upon the personal rights of the individual 
and pried into the business affairs of merchants would de- 
velop without opposition. It met with bitter opposi- 
tion by retailers, and at first it was not generally en- 
dorsed by jobbers. While many of the jobbers accepted 
it at once as valuable to them and supported it, others 
looked upon it as an unnecessary institution, and some 
agreed with retailers that it was contrary to the spirit 
of free institutions. At first reports had to be based 
upon hearsay evidence in communities and upon records 
of deeds and mortgages. Only in exceptional cases 
could the merchant be induced to give his standing. 
This prejudice against the agency has been bitter to 
within the last generation. Only within the last twenty 
years has the agency been conceded the right to require 
a signed statement. Even now the signed statement 
is repeatedly refused; but merchants generally feel that 
it is to their interests to comply with the requests of the 
agencies in giving statements over their own signature. 
A right has been established here by private companies 



140 MERCANTILE CREDIT 

to inquire into the business affairs of individuals, a con- 
dition which has been impossible in foreign countries. 
In no country other than the United States do the 
mercantile agencies go so far in investigations of private 
business. Elsewhere the rights of an inquisitorial char- 
acter have been monopolized chiefly by the state. 

An investigation of certain business conditions in the 
United States and abroad will reveal the causes of the 
difference. In older countries business relations are 
more fixed; they move in more definite channels, and are 
better understood. Private agencies exist in other coun- 
tries, but their information on the credit worth of appli- 
cants for credit is not as complete as in the United 
States. 

In Germany a credit reform association was organized 
in 1882 by manufacturers, merchants, bankers, and other 
business men, for the purpose of distributing confidential 
information regarding the standing of firms seeking 
credit, and of collecting delinquent debts. The informa- 
tion procured and disseminated, however, was based on 
the records of business men in their dealings with one 
another, and on what could be learned in a general way as 
to their financial standing. This association, though still 
in existence, is not highly efl&cient, because the oppor- 
tunity of procuring statements from merchants over their 
own signature is denied it. Even the right to investi- 
gate their standing from government records is re- 
stricted. In the United States, on the other hand, 
records have always been open to the inspection of the 
public within reasonable limits. 



SOURCES OF CREDIT INFORMATION 141 

The mercantile agency here grew out of our credit 
system under the peculiar conditions of the rapid exten- 
sion of commerce in a new country. Com- 
mercial centers were springing up in the ^^^ *^°"" 
newly settled parts of the south and west, America 
and new customers were continually appearing were 
in eastern houses and asking for credit. Busi- favorable 
ness firms in the early days had but a transient ^^ ^'^^ 
existence. Attachments to a community agencies, 
had but little force, and migration to loca- 
tions where more enticing opportunities were presented, 
was frequent. Business, too, was much more specula- 
tive in its nature then than now. While great successes 
are not infrequent in new countries, the business death 
rate, too, is high. In older countries business connections 
are more fixed, and business methods assume a more 
conservative tone. The same firm name often prevails 
in a community for generations, and the character 
of the business is analogous to that of Tennyson's 
"Brook.'' While great successes are very infrequent 
and almost impossible, the business death-rate compared 
with new countries is low. With the constantly shift- 
ing changes in mercantile life in America in early days 
credit was freely extended. Under these conditions 
debtors are more inclined to permit inquiries regarding 
their business standing. The two periods which com- 
pletely unsettled business relations were most responsible 
for the origin and growth of mercantile agencies. The 
origin of the institution is traced to the endeavor to re- 
store commercial order from the bankrupt institutions 



142 MERCANTILE CREDIT 

left in the wake of the crisis of 1837, and the period 
of its greatest prosperity followed the unsettled busi- 
ness relations created by the Civil War. It is at such 
times that the business houses appreciate most the 
need of such information as can be given by organized 
agencies. 

Retailers jSnally saw many of the advantages which the 

agency conferred. While the close personal relations 

between themselves and the city merchants 

tail r gradually disappeared, this loss was compen- 
sated for in other ways. As soon as the 
agencies published the standing of business men, it was 
unnecessary for them to confine their city trade to one 
or a few merchants. They took advantage of the com- 
petitive principle and purchased where the best bar- 
gains were to be had. When they became subscribers 
to the agency, they learned what merchants in the 
city had the best rating, and this influenced them in 
buying. 

In local communities the merchant grants credit to 
those only in whose intention and ability to pay he has 
confidence. Before credit is given, a personal knowl- 
edge of the man is necessary. Bankers likewise acquire 
a personal knowleedge of men before credit is given. 
With the jobber and manufacturer the case is different. 
Their customers are distributed over a wide area, they 
come in contact with them only occasionally, and con- 
sequently their facilities for knowing customers are 
more meager than those at the command of the banker 
and retailer. 



SOURCES OF CREDIT INFORMATION 143 

To the jobber and manufacturer the service of the 
agency was seen to be invaluable so long as the reports 
were accurate. The larger houses which sent value to 
agents to investigate the standing of their manufac- 
customers, found that the system provided *"^®^ ^^^ 
by the mercantile agency permitted them to ^° 
secure their information more cheaply. They were 
notified as to who the reliable merchants were, and 
were warned against men without business standing and 
of bad financial habits. A merchant who found himself 
unable to pay his debts frequently moved to a com- 
munity where he was unknown, secured credit, if pos- 
sible, and began again. In keeping careful records the 
agency traced these men from state to state, creditors 
were notified, and either settlements were effected or 
credit was refused. 

The honest merchant derives an advantage when the 
agency makes it impossible for the unworthy to receive 
credit, as he is freed from competition with undesir- 
able competitors. The competition of the business 
pirate and of the incapable is dreaded by honest mer- 
chants. Those who purchase without paying for what 
they buy are most indifferent as to selling prices, and the 
competition of such men makes deep inroads into the 
trade of other merchants. The same can be said with 
equal certainty of the merchants without business ca- 
pacity, whose chief aim is to have a large trade regardless 
of selling prices, and who sooner or later must go down 
in the competitive commercial battle. Through the 
continued inspection and observation of the work of 



144 MERCANTILE CREDIT 

business men, a force is exerted which lifts the methods 
and ideals of business to a higher plane. Favorable 
reports are responsible for credit, and to credit is fre- 
quently due business success. The agency contributes 
one of its chief services in working out a selective proc- 
ess by which the weaker members of the mercantile 
community are eliminated, and the most capable are 
permitted to survive. 

One of the rights acquired by the mercantile agency 
is to demand a signed statement of the merchant. This 
demand is by no means universally complied 
tT^ t ^^^) ^^* i^ gradually growing so that mer- 
chants are beginning to feel that a difference 
is made in their standing when they refuse to give it. 
It possesses a legal status, since false statements make 
the individual criminallj'' liable for obtaining goods under 
false pretenses. On this account it is considered valu- 
able to the granter of credit, and is given with care by 
the merchant. Individual reports have been given all 
along when requested, and one of the chief services of 
the agency consists in doing this. 

Organization. 

The agencies are organized under the control of cen- 
tral offices in New York. The country is divided into 
districts, and in each district is an office to be 

Orgamza- supported by the district and to have charge 

tion of tn© 

agencies. ^^ ^^^ collection and the dissemination of 

information within the district. The R. G. 

Dun Co. has 223 such districts. In each district there 



SOURCES OF CREDIT INFORMATION 145 

are usually many counties. The company has three 

classes of investigators: (1) the traveling reporters, who 

visit every locality at least twice a year, and (2) the 

local reporter, who usually resides in the county seat, and 

(3) an attorney, who also resides in the county seat. 

Both the traveling reporter and the local reporter serve 

an apprenticeship in the district office before they are 

employed as reporters. The attorney who is employed 

as reporter as a rule gives only a portion of his time to 

the work and makes emergency reports or reports of 

developments which the district office needs to know at 

once. He is also the advisory agent of both the traveUng 

reporter and the local reporter. 

In some cases the work is divided into the difficult and 

the less difficult tasks and the more experienced men are 

put on the hardest problems. In the larger 

cities the work is classified with respect to ^P®"^^" 
. , - t . ' ^' zationin 

kmds of busmess, and reporters specialize ^ork. 

on classes of work. There is a great advan- 
tage in this because where there are many lines of busi- 
ness a reporter is put on each line; as a result he be- 
comes an expert in reporting on his particular class of 
business and his services are continued in that field for 
years. 

Each district office often has a number of sub-offices 
in its territory. The number of sub-offices depends upon 
the size of the district and other conditions. Sub- 
From these sub-offices reporters are sent out oflaces. 
over the territory of the sub-office to make investigations 
and reports. 



146 MERCANTILE CREDIT 

Each of the two leading agencies has foreign offices in 
every civilized country. The number of these offices 
Organiza- ^^P^^^^ ^^ ^^^ ^i^^ of the country and the 
tion of importance of its trade to the United States, 
foreign The R. G. Dun Company has four offices in 
Mexico and one in all the leading cities of 
Europe. From these offices traveUng reporters are sent 
out to collect trade information. While the office is 
managed by an American the traveling reporters are 
almost invariably natives of the countries where the offices 
are situated. The reports obtained abroad are not as 
complete as the reports secured from business men in the 
United States, nor is there any great degree of uniformity 
of reports of the different countries. The managements of 
foreign offices in each country study the habits, methods, 
and policies of business men especially with reference to 
credit and there obtain such information as will make 
their reports conform as nearly as possible to the Ameri- 
can reports. The information collected at the foreign 
offices is primarily for the benefit of American exporters 
who are subscribers to the agency. Foreign business 
men, however, make some use of the special reports ob- 
tained by the foreign offices. 

In the New York office are assembled all the reports 

made out both at home and abroad for both the Dim and 

Bradstreet agencies. The Chicago office is to 

Clearing ^ ^ess extent a clearing house for reports. 

house 

offices. ^^ ^^^ Chicago office are collected all reports 

made out in the western part of the United 

States, Alaska and Mexico. There is an advantage in 



SOURCES OF CREDIT INFORMATION 147 

having territorial clearing houses as any one in a given 
district desiring reports from other sections of the district 
can obtain them sooner than if he had to send to New- 
York for them. For instance with the present plan a 
merchant in Minnesota desiring reports from New Mexico 
can send to Chicago for copies of them. Copies of reports 
are always made out, and any office can obtain reports 
from any district where its subscribers are interested. 
The Columbus office obtains reports from every county 
in Ohio outside of the counties where Cleveland and Cin- 
cinnati are situated, because its patrons are interested in 
reports from every county in the state outside of these 
two cities. 

Information is secured directly from merchants and 
manufacturers, and they are asked to make a signed 
statement giving the status of their business, 
containing assets, liabilities, capital stock, in- ^^ 
cumbrances on property, etc. Form VI is securing 
the property statement form for corporations; credit 
Form VII is the property statement form for ^ orma- 
individuals and partnerships, used by the R. G. 
Dun Co. The differences in the questionaires of the two 
forms are due to the differences in organization and in 
responsibility of the two types of concerns. If the 
person should refuse to make a signed statement the 
information is reported orally. If he refuses to give 
any information at all, the investigator finds out what he 
can from public records and from people in the com- 
munity. Whether a signed property statement is made or 
not the public records are always investigated to learn if 



148 MERCANTILE CREDIT 

Statement as a Basis for Credit 

MA.DB TO 

R. G. DUN «& CO. 



'Name of CorpoivQoot ^ 

LocmUoa County of- 



Froa loveatory ot- 



Date of Incorporation Under Laws of_ 

Authorized Capital Stock, $ ^No. of Shares P 



Amount of Stock subscribed, $__ Paid in, IN cash. $_ 

Amount paid in otherwise than in cash and how. $ 



Limit of indebtedness allowed, $. 



Bonded Debt. $ Drawing interest at per 

Whom does the Corporation succeed ? 



President 



Vice-President, 

Secretary, 

Treasurer, 



Superintendent or General Manager, 



DIRECCrORS. 



FORM VI. 



SOURCES OF CREDIT INFORMATION 149 



Real Estate and buOdhigs, « , $. 

Machinery sad piam. ,..•• «• 

Stack oo hand taw Bt>d fiflisbe<) • . . 

BiUc receivable, at realizable value, ......••• 

Accounts receivable, considered good , 

Cosh on haod and in bank 

AU other assets, exclusive of patent Hghts. ^ , • ^ 

TotaJ Assets, , S_ 

For merchandise, open accomii S , 

Bills payable, , , 

For machinery, , • . 

Mortgages on real estate 

DebU secured by mortgage (or lien) on personality. . . 

For borrowed money, unsecured, ...... 

All other liabilities, contingent and otherwise, , > . ._ 

Total. LiabUities, , , . . . S_ 

Amount of Assets over Liabilities, • $_ 

INSURANCE ON MERCHANDISE, $ 



ON BUILDINGS. MACHINERY AND PLANT $. 
Yearly e^rteoi of business, $ 



Bsnk and oth^r References: 



.A.DOIOriONA.L, I<U£AdUVRK:S. 



FORM y\.— {Continued.) 



150 MERCANTILE CREDIT 



Statement as a Basis for Credit 

MADE TO 

R. G. DUN & CO. 



0/ tbe Financial Condition ^^ 

Location County of Stateof. 

From inventory of .190 Business 

Dated . 190 



A.SSECXS. 

Merchandise on hand and irt transit. ,«...,... t $. 



Outstandings, including bills receivable, open accounts, «tc at realiuble value. 

Cash on hand aad in bank 

Other PERSONAL assets, consisting "f 



Total available assets, ..,.,,..•..« $ . 
x<i A D ix«x -ri Ei s . 
For merchandise not due, ,,..... $ 

For merchandise past due,» »»..»». _____ 

Loans from bank, «,«<••• t > ______™___^ 

Loans other than from bank. ,...,,, _ 

Other obligations, »,*«..•*.•. ^^^^^^^^ 

Totalliabilities, ,,...,,,,,., $. 

Surplus in business, .«.,,<>••>•• 

REAL ESTATE V Describe, locate, and value sep»r»tely. rfW »* wAtsr nawt hrld 



Total value of real estate. •.,..., $ . 

Mortgages c>f amount unpaid thereon, • < i . . .___— . 
Equity in real estate. ..,.,....,.. $_ 

Total worth, in and out of business, ...»',,. 

Insurance. on stock, $ On rtal estate, % _ 



Annual business amounts to $ Amonot of legal exemptions, $ , 

Amount of chattel mortgages or judgments, $ _______________ 

Individual obligations of each partner, «_______^__________________ 



Ever burned out ? If so, state circumstances <}f fire, 
Give full name of all the partners, ____________ 



Refereoees: 

Bank with 



FORM VII. 



SOURCES OF CREDIT INFORMATION 151 

there are mortgages or other encumbrances on the 
property. The agency also learns what it can of the 
habits and managing ability of the manager of the busi- 
ness. It finds out whether he attends to business, what 
his reputation for integrity and promptness is, and 
whether or not he speculates outside of his business. 
Whenever any suits are brought against him or when 
a mortgage on his property is given, or when losses are 
sustained by fire, these facts are immediately reported 
by the local agent to the branch office, and the creditors 
of the merchant are notified. Regular reports are made 
twice a year. 

All the information gathered is classified and filed 
in card cabinets with reference to counties and cities, 
the names of the firms represented being ciassify- 
arranged alphabetically with reference to ingand 
cities. Whenever an inquiry is made re- ^^^ i^- 
garding a firm the number of the inquirer is °'^^ °"* 
placed on the firm card. If changes take place in the 
status of the firm, the inquirer can be informed at once. 

The information is distributed to the trade through 

the quarterly reference books and special reports. 

Suscribers pay $100 a year for the quarterlies, 

and for a certain number of special reports. -P^stribu- 

tion of in- 
When all the regular reports are received and formation. 

many of the special reports, the rates are 
much greater. Some of the subscribers to the two lead- 
ing companies pay as high as $30,000 annually for the 
services rendered. Each subscriber is invited to submit 
a list of his customers in which he is interested. Some 



152 MERCANTELE CREDIT 

submit names of all their customers, while others give 
no report at all. However, the names submitted in- 
clude nearly all concerning whom subscribers desire 
specific reports. When a special report is desired, the 
information is usually wanted immediately by the sub- 
scriber. The information at hand is collected, and, as 
a rule, it is reported within a day. If there has been 
an important change in the work of the concern, so that 
an investigator must visit the manufacturer or merchant, 
sometimes several days are required to make the report. 
In the quarterly reference books furnished the sub- 
scribers by the two agencies, business concerns are classi- 
fied with reference to their capital rating 

Quarterly ^^^ credit rating. Signs are used to indicate 
reference . . -k^ , \^ . i 

books. "^^^ ratmgs. Nearly 20 signs are used to 

indicate financial ability and about 10 to 
indicate credit standing. Many factors enter into the 
rating assigned a business man besides his financial re- 
sponsibility. His promptness in paying, his business 
ability, his personal habits including his inclination to 
speculate outside of his business, his refusal to furnish a 
report to the investigators, etc., are all factors which must 
be taken into account in assigning him a rating. In these 
signs which designate credit ratings is condensed a great 
deal of information. They are used for purposes of con- 
venience to subscribers to enable them to read at a glance 
the credit rating of those in whom they are interested. 
Then, too, without such a condensation of information the 
quarterly reference books would be too bulky to be usable. 
Until about five years ago the agencies issued daily 



SOURCES OF CREDIT INFORMATION 153 

sheets or reports to supplement the quarterly reference 
books. To take their place greater use is made of the 
special reports. The daily trade reports be- uiscon- 
came bulky and inconvenient to use. When tinuance 
first issued they were intended to convey of daily 
confidential information to subscribers, but 
instead of being so treated they fell into the hands of 
collectors and collecting agencies and were used by them 
with great regularity in furthering the interests of their 
business in preying on those whose credit standing was 
not strong. To protect the trader from the irresponsible 
collector and to guarantee that the information furnished 
should be used only by those for whom it was intended, 
the agencies abandoned issuing the daily reports and gave 
more attention to the preparation of special reports 
which were sent to subscribers. Credit men who at 
first objected to the discontinuance of the daily reports 
now find the special reports more satisfactory to them. 
An exceedingly valuable service is rendered by the 
two agencies, through their magazines, in reporting 
business conditions. These weekly reports Maea- 
furnish far more valuable and reliable infor- zines of 
mation on the status of business conditions, *^® 
of trade and market conditions in every ^g®^^^®^. 
section of the country, than any publication dealing 
with similar subjects. With agents in every section of 
the United States, and even in foreign countries, the 
agencies occupy a strategic position for collecting and 
making public reliable information which enables busi- 
ness men to adjust their plans in conformity to changes 



154 MERCANTILE CREDIT 

continually taking place in the business world. The 
fact that this is only an incidental feature of their busi- 
ness in no way lessens their value. 

Utility of the Agencies 

Recently there has been a great deal of criticism of the 
mercantile agencies by credit men and organizations of 
credit men. The formation of credit men's associations 
and exchange information bureaus, and the efforts of in- 
dividual credit men to gather a class of information 
concerning solicitors of credit which is not furnished by 
the agencies, are evidences of the shortcomings of the 
mercantile agencies from the point of view of the credit 
man. Mr. Prendergast in his work *' Credit and Its 
Uses'' claims that "there is a distinct feeling that while 
the mercantile agency service is valuable, it is not in- 
dispensable. Many of them have come to the opinion 
now that this class of information is only secondary." 
However, after several years of experience with credit 
exchange bureaus the complaint is made that some of 
the members of the bureaus rely exclusively on the bureau 
for credit information instead of subscribing to mer- 
cantile agencies and having the two sources of infor- 
mation supplement each other. 

The criticism of the agencies by credit men has led to 
a great improvement of their service in the last twelve 
Improve- ^^ fifteen years. The National Association 
ment of of Credit Men has a standing committee on 
service of mercantile agencies, and many of the local 
agencies, associations of credit men have such a com- 



SOURCES OF CREDIT INFORMATION 155 

mittee. These committees have cooperated with the mer- 
cantile agencies, the service of the latter has been im- 
proved, and a better understanding prevails between the 
mercantile agencies and credit men as a result of their 
cooperation. 

The chief criticisms of the mercantile agencies are 
the following: 

1. Reports of agencies are sometimes misleading since 
the failures of those who have a good standing with Dun 
and Bradstreet sometimes occur. 

2. Special reports furnished are unsatisfactory on 
account of the delay in securing them. 

3. They fail to furnish ledger information. 

4. The reports are lacking in system and definiteness. 

5. The reports lack in comprehensiveness, in detail, 
and in attention to essential elements. 

Credit men and the agencies themselves are better 

informed as to the vahdity of these criticisms than the 

writer. A few observations, however, may 

be made with safety. Where several hun- . ^ , 

mistakes 
dred thousand reports are made annually, ^^ made. 

covering all business conditions and every 
section of the country, it is to be expected that some 
errors will be made, and that some Houses will be de- 
clared to be in good standing which go into the bank- 
ruptcy court. When judged by this standard alone the 
percentage of such errors determines the efficiency of 
the agency. 

That the agency is slow with its reports is only partly 
true. Much depends on the nature of the informa- 



156 MERCANTILE CREDIT 

tion desired and the difficulty of obtaining it. No rules 
can be given specifying the time required for such a 
report. If the agency has all the informa- 
agencies ^^^^ desired at hand the report can be fur- 
slow in nished the same day that it is requested. If 
making the information must be procured after the 
^^^"t ? request for it is received it will take one or 
several days to make out the report — the time 
depending upon the difficulty of securing the desired 
information. 

The agencies have failed to furnish ledger information 
and they claim that it is impossible for them to devise 
a system to exchange ledger information, 
cannot "^^ ^^^ been suggested that the agencies fur- 
furnish nish reports free to all who furnish the agency 
ledger ledger information. Both agencies refuse to 

in orma- ^^ ^j^j^^ claiming that as they are private 
money making concerns it would be impos- 
sible for them to adopt this policy without eliminating 
in a measure the source of their profits. 

The criticism that the reports of the agencies are 
lacking in uniformity of form and development has un- 
doubtedly improved the character of the 
e orm j-gp^j-ts. However, the argument of credit 
men that a universal form of report should 
be adopted to facilitate the reading of reports by credit 
men, does not seem to be valid. Both agencies require 
their reporters to follow a topical order of development 
in making their reports. However, both agencies abso- 
lutely refuse to adopt a uniform form of report, a thing 



SOURCES OF CREDIT INFORMATION 157 

which would dispense with the need of having the credit 
men read all of each report. They claim that their re- 
ports are made out in such a way as to require the en- 
tire reading of a report and that it is only by reading 
everything that is reported that the credit man can have 
an adequate idea of the credit situation of the applicant 
for credit. Reporters are given the greatest latitude to 
write their reports in such a way as will give a correct 
view of the standing of the business reported. 

With reference to comprehensiveness, to detail, and 
to emphasis on essential elements improvements are being 
made by the agencies. Shortcomings of reports in these 
respects are due chiefly to the inefficiency of reporters. 
Agencies claim that they are demanding higher stand- 
ards of efficiency of their reporters and that they are 
increasing the costs of their service in making their 
reports more complete. 

The active competition between the two agencies and 

the organized interest in them and their criticism of them 

by credit men will greatly improve the service 

of the agencies. The business community Value of 

the 
has depended on these agencies so long that agencies. 

it is not likely that it can soon dispense with 
their services. It has become so well adapted to them 
that it is more inclined to look harshly upon their short- 
comings than justly on their merits. Their real merits 
could never be appreciated unless it were possible to 
forego their services for a while. For only in this way 
could business be made to realize how much it depended 
upon them. 



CHAPTER IX 

SOURCES OF CREDIT INFORMATION 

GENERAL SOURCES 

Salesmen 

Aside from the information obtained from the mercan- 
tile agency by the credit department it obtains a great 

deal of information from a variety of sources, 
salesmen ^^ many respects the traveling salesman 
can give occupies, by virtue of his work, a better posi- 
important tion than any one else to obtain the kind of 
cre 1 in- jnfQrmation which a credit department needs. 

He visits every community where credit is 
granted to business men. He ought to be able to learn 
through his relations not only with the business man seek- 
ing credit, but from others in the community with whom 
he has relations of either a casual or a business character, 
something of the credit standing of those in the com- 
munity in whom the credit department of the house is 
interested. In selling to the buyer he knows from his 
experience with him whether he is a successful purchaser 
or not. From frequent visits to his store he knows some- 
thing about his stock of goods, the character of his trade, 
and the adaptation of his business to his trade. Aside 
from this, there are many incidental facts that determine 
success or failure with which the salesman is famiUar. 

158 



SOURCES OF CREDIT INFORMATION 159 

In the United States the traveling salesman first ap- 
peared as a part of our mercantile system primarily as 
a credit man. Near the middle of the nine- character 
teenth century when jobbers and manufac- of early 
turers of the East abandoned the policy of ^^^^ ^^ 
selling almost exclusively to traders who vis- ^^ esman, 
ited their houses, and went into the West after trade, they 
sent men into the new communities primarily because they 
were interested in knowing the credit worth of those to 
whom they wished to sell. These salesmen became at the 
very outset credit men and collectors as well as salesmen, 
and it was to render the service chiefly as credit men and 
as collectors that they were employed as salesmen. With 
the newer developments of our mercantile system the work 
of the salesmen and of that of the credit and collection 
departments have been separated. Through specializa- 
tion the credit men and collectors have limited themselves 
exclusively to their lines of work, while the salesmen have 
become almost exclusively salesmen. In recent years the 
tendency is to bring the salesman back into the credit 
work again because it is believed that by virtue of his 
position he can be of material assistance to credit men. 

The cooperation of the credit man and salesman is 
not as effective as successful business methods should 
require. The credit man should be an adviser of the 
traveling salesman, while the latter is in a position to 
provide the former with invaluable information. The 
nature of their work makes them radically different, 
and an altogether different type of man is developed in 
each position. The salesman's work compels him to 



160 MERCANTILE CREDIT 

adapt himself to all classes of people. He is sympathetic 

and responsive, and his feelings are easily aroused by 

the woes of the merchant. His success in 

Differ- selling goods depends upon his personal rela- 

eiices 

between ^ions with the merchant. He becomes ac- 

the customed to their points of view, and con- 

salesman sequently often becomes more interested in 
,. his customers than in his employer. The 

man. credit man, on the other hand, is cold, re- 

served, and unsympathetic. He is not easily 
moved by the misfortunes of people. His judgment is 
influenced by no motives other than the financial suc- 
cess of his firm. The work of the credit man is to 
make adjustments. His is the last court of appeal. His 
function is to guide business into safe channels. 

In the business world the work of these two men has 
been differentiated, because two very different types are 
demanded and consequently many believe that it is a 
great mistake to use a salesman as a credit man and 
to withdraw him to a certain extent from the line of work 
in which he is efficient into a line to which he is little 
adapted. For this reason many are inclined to believe 
not only that the salesman should not do credit work, 
but that his credit reports are practically worthless. 

The interests of the two are in some ways diametrically 
opposed. The one is anxious to secure as large an amount 
of sales as is possible, because his salary is to a certain 
extent determined by sales. The other is anxious to 
secure a maximum of sales to reliable firms, or to put the 
matter in another way, a minimum of sales to question- 



SOURCES OF CREDIT INFORMATION 161 

able firms. In most cases the credit man is a stockholder 
in the concern, and on this account has an additional in- 
terest in having as few unprofitable sales as possible. 

If the services of the salesman were so rewarded that 
his total sales would not influence his salary, he would be 
more serviceable to the credit man. In reporting the 
character of the business, the type of the business man, 
the character of the community, the industrial conditions 
upon which the success of the merchant depends, etc., 
he can give the credit man facts that are invaluable. 
From his broader survey of facts, and from his experience 
in watching credits, the credit man can estimate with a 
high degree of accuracy the probability of the success of 
the merchant. In going over routes with salesmen, the 
credit man can guard the salesmen against certain 
customers and can direct them into profitable fields. 
Through the supplementary nature of the work of the 
credit man and the salesman, and on account of the 
complementary qualities in the men, they should be 
mutually helpful, and their cooperation should make 
busines safe. 

The salesman is sometimes employed in collecting 
debts, but in this he is usually a failure. The type of 
man required for selling goods is different 
from the type required for collecting accounts. S*^®sman 
Besides, there is a direct economic loss in di- collector, 
verting, even for a part of the time, the atten- 
tion of a man from a field in which he is skilled into a 
field for which he is not fitted. The salesman's relations 
with merchants unfit him for collecting debts from them. 



162 MERCANTILE CREDIT 

SALESMAN'S CREDIT REPORT 

FAIRBANKS, MORSE & CO. 

ST. LOUIS, WO. 

(Membct -of The National Asiociotion ol Gedit Mea) 

One o( tliete lepoit* mittt be filled out hy tke uletaaa when taking oniet trom ctulemet or cuitomen 
with whom we \tye had no ptevioui dealiBg*' Where it it Mstible to do «o each and eTerjr qiiaUoB ihould 
be antw«ied hilljr and iDtclligently. These reports ate for the guidance o( the Credit Department and when 
properly filled out are of material aiti stance in determining the propriety ol extending credit. The talesman i* 
requested to give all information on these forms and not em ody it ia letter regatdisg the order as these leporu 
are to be filed in our "Credit Foidets," 



Name- 



Address 
Age 



Busioeas 



How long eogageti to 
Banks with 



Owns real estate. 
Incumbraoce* — 



Stock valued at $< 



Supposed net worth. $. 
Buys from . 



REMARKS: 



FORM VIII. 

Report to be filled out by salesmen when taking orders from new 

customers. 



SOURCES OF CREDIT INFORMATION 163 



t. ADLER, BROS. & Co., Inc. 

Dear Sirs: In response to your request I submit the following information coneeroiijig. 



ruu. N*«i( or c*CH mutikii. natiohautt. aoi. 



The firm has been in btuinew 

since . 

Formerly were M. ■ 

or clerked for . ■. 

of._ . ^ .^_ 



or (here state other antecedants). 



Lines of Merchandise carried?- 

Your estimate of present value of stock ? | _ 

Do they do a cash or credit business? 

City or Country trade principally? 



. Condition of stock ?_ 



-Amount of annual sales? $_ 



Location relative to business centre ? 

Local opinion as to habits ?____ Ab 

Is stock well insured?, For how much? $^. 

Is the firm, or any member of it, engaged or interested in other ventures I 

If so give particulars . 

Heal Estate in own name, If any, consists of._ 
«tores and valued at $ ■. 



-Expenses? 



-Is firm thought making jnoeey?. 



-houses.- 



.and mortgaged for $-. 



of this real estate the following is used as homestead 

■and valued at % and mortgaged for $_ 



If they are just starting in business, what capital has the concern and in what shape? .Cash, $_ 

other Assets, $ . 

Describe the other Assets ^ 



Buy principally from the following houses (give address) : 

Clothing 



Hats and Caps 

Mens' FumisbingSL. 
Other lines 



Yonrs respectfully. 



FORM IX. 
To be used by salesmen when taking orders from new customers. 



164 MERCANTILE CREDIT 

Inquiry blanks have been devised to simplify and 
make definite the work of the traveling salesman in fur- 
nishing credit information. These blanks rep- 
bl^^^ resent extreme types. Blank VIII is a simple 
type which calls for information giving the 
name of the firm, the kind of business, the length of 
time the business has run, the value of stock, the en- 
cumbrances on thep roperty and the firm's bank — which 
information is to be obtained directly from the seeker 
for credit. Aside from this there is a blank space for 
information of a more general character, which the sales- 
man may learn incidentally from the purchaser and from 
others in the community. This form has a fatal weak- 
ness in that a report of the insurance on the property 
and stock is not required; the amount and kind of this 
insurance are in many respects the most important 
factors to be taken into account by the credit man. 
Otherwise this form can be used to a great advantage, 
and it is difficult to see how its use would stand in the 
way of the success of the traveling man as a salesman. 
Form IX, to be used by the salesman, calls for this in- 
formation and other information of a more detailed 
character. The nature of some of the information 
sought in this form is such that many purchasers would 
be unwilling to furnish the information to a salesman 
who is seeking to sell goods, and the salesman would 
be very much disinclined to use it on account of the 
danger of preventing a sale. Consequently it is be- 
lieved that a more simple type of blank is best for the 
salesman to use, and the credit men can then depend 



SOURCES OF CREDIT INFORMATION 165 

upon the wisdom of the salesman in securing other 
information of a detailed character from others than 
the purchaser himself. 

Attorneys 

From the attorney in the community where the busi- 
ness house makes sales, the credit man obtains impor- 
tant information. Mr. Prendergast in Credit attorneys 
and Its Uses gives five reasons why an give 
attorney is an excellent medium for the credit in- 
procurement of credit information: *' First, 
the organization of his ofl&ce makes it convenient for 
him to act as a collector and distributor of such in- 
formation; second, a lawyer invariably has a large circle 
of acquaintances, both of a business and social charac- 
ter, and this acquaintance enables him to secure infor- 
mation in regard to the circumstances of people to better 
advantage than others whose connections are not so 
extended ; third, a lawyer's duties afford him much private 
information in respect to people's affairs, a large per- 
centage of which information he is at perfect liberty to 
utilize as credit material without in any sense disclosing 
professional secrets; fourth, his daily association with 
matters in litigation opens to him an ample field of 
information, a good part of which is hearsay, but a 
large portion of which may also have considerable 
foundation in fact, and this information of either class 
can be judiciously diffused for credit purposes; fifth, he 
is frequently called upon to act as a collector of claims 
against people or in behalf of clients in cases where 



166 MERCANTILE CREDIT 

accounts are of a disputed character. The information 
he acquires through association with this work is of 
vital interest to credit givers and no better class of 
information could be obtained."* 

Attorneys themselves have frequently volunteered 
to furnish credit information to business houses because 
of the advantages that may accrue to them in 
securine ^^^ ^^^ ^^ employment in case of litgiation. 
credit in- For this reason they have made out attorneys 
formation lists, which manufacturing and jobbing houses 
may use in calling upon attorneys to furnish 
credit information in the community where 
they live. This volunteer service on the part of at- 
torneys has, on the whole, proved unsatisfactory not 
only to the attorneys themselves but to the houses 
that use them for credit information. The attorneys 
learned that upon the whole they received relatively 
little benefit for the services which they rendered, and 
in many cases a great deal of service is rendered in 
furnishing the credit information for which no returns 
are received. Upon the other hand, business houses 
complain of the character of the service rendered by 
attorneys. They claim that the attorneys prepare 
reports which are superficial in character and not based 
upon facts which could be easily procured upon in- 
vestigation. When the attorney receives no returns 
for his services, it is apparent that his services will 
be of an inferior character. To correct this, many busi- 
ness houses make a practice of sending a small fee, 
1 Page 163. 



J 



SOURCES OF CREDIT INFORMATION 167 

usually one dollar, to the attorney along with the credit 
blank which he is to fill. The fee furnished is intended 
to pay the expense of the service in making the report. 
In cases where a more thorough investigation is desired 
the business house sometimes pledges itself to make 
further compensation commensurate with the services 
rendered by the attorney. 

Since commercial work has brought into existence a 
class of attorneys who specialize in this field almost ex- 
clusively, many attorneys have developed oflGlces which 
should be, in the very nature of things, of great help 
to credit men. They have large cabinets where detailed 
information is filed concerning the daily routine of their 
business. Their contact with the business affairs of the 
community is such as enables them to know more defi- 
nitely than any one else in the community the credit 
standing of the people. If he can make this informa- 
tion which he has in his possession useful to the credit 
man in an honorable way, this type of attorney can 
render a great deal of valuable service to credit men. 

Bank References 

Banks are used in many countries by mercantile insti- 
tutions as an important source of credit information. In 
their dealings with their customers and from the prop- 
erty statements which they receive, it is possible for them 
to furnish a great deal of valuable information to credit 
departments. Upon the whole they have refused to fur- 
nish to credit men important information which they 



168 MERCANTILE CREDIT 

have. They have insisted that in the United States it 
is impossible for them to furnish the information which 
credit men desire without being false to their own clients 
and without injury to their own business. The credit 
information which credit departments receive from bank- 
ing institutions is practically a negligible quantity. 

Traveling Credit Representatives 

Some of the most valuable credit information is ob- 
tained by oral investigation. By visiting the business 
house which is seeking credit the credit representative 
can learn either directly or indirectly very valuable in- 
formation to serve as a basis of credit. For this reason 
large houses doing an exclusive credit business have em- 
ployed traveling credit representatives who obtain much 
valuable credit information which guides them in grant- 
ing credit. They cover the same territory as is covered 
by the traveling salesmen and they obtain their informa- 
tion by the use of a questionaire which is filled out after 
a personal interview with the seeker for credit. This 
credit representative learns incidentally from his con- 
versation with the buyer many subsidiary facts which 
are important in granting credit. He learns all he can 
from court records and from conversations with other 
men in the community. When he leaves the office to 
visit these men, he goes prepared with all th« facts that 
the credit office can furnish as a preliminary to the mak- 
ing of an investigation. In some cases these traveling 
credit representatives examine the books of debtors and 



SOURCES OF CREDIT INFORMATION 169 

confer with them in detail on the management of their 
business. This is done only when the debtor's status 
is precarious, and when somewhat drastic methods must 
be pursued. In ordinary cases of credit investigation 
nothing of this sort could be done without the loss of 
customers. 



CHAPTER X 

SOURCES OF CREDIT INFORMATION 

CREDIT EXCHANGE 

A SYSTEM of credit exchange has developed in the last 

fifteen years as the most accurate and in many respects 

the most important source of credit informa- 

^ tion. This system was the outgrowth of the 
velopment • . r , i . . /. 

of credit organization of local associations of credit 

exchange men. Local as yet in character, it is the most 
in last important factor in many communities in the 

years. granting of credit, and it promises to occupy 

a more important place in the future in the 
system of credit giving. Business men are the only 
source of credit information. A knowledge of a man's 
credit or of what credit he ought to have must be sought 
in his experience, that is from those with whom he deals. 
Other factors of a subsidiary character, such as his 
environment, capital, habits, etc., must be noted. The 
Credit Exchange Bureau represents an attempt by busi- 
ness men to learn from each other about the credit stand- 
ing of their customers. It is the outgrowth of an en- 
deavor to obtain the most accurate information of this 
character from each other with the least effort and 
expense. 

170 



SOURCES OF CREDIT INFORMATION 171 

The information furnished by the Credit Exchange 
Bureau is chiefly from ledger experience, and this has 
been proved to be the most valuable informa- Exchange 
tion to the credit man. It is supplementary of ledger 
to and a corrective of data collected by mer- informa- 
cantile and other agencies and does not sup- ^°^' 
plant them. While the mercantile agency procures 
information on the past experience of a business man, 
his character, his habits, his ability, his environment 
to do business, the Credit Exchange Bureau limits 
itself chiefly to one source of information, ledger 
and trade experience. While no one would discount 
the value of the general character of the information 
procured by other sources as a basis of credit, the 
function performed by the Exchange Bureau is a 
different one. 

The inadequacy of other classes of information was 
responsible for the development of the Credit Exchange 
Bureau. The age of the mercantile agency value of 
report and the method of procuring it are ledger in- 
often arguments against it. Allowance must formation, 
be made for the reports of salesmen since the buyer is 
often his friend. The local attorney or agent is a 
fellow townsman of the buyer and often his neighbor. 
Besides, the buyer who intends to defraud sellers, em- 
ploys methods which usually delude all other agencies. A 
favored practice of such is to keep good accounts with a 
few houses, which are given as references, while goods 
are purchased from a large number with no intention 
of paying for them. 



172 



MERCANTILE CREDIT 



Business 
men at 
first 

skeptical 
about ex- 
changing 
ledger in- 
formation. 



When the first attempts were made to exchange ledger 
information after the local credit men's associations 
were formed, credit men were skeptical about 
furnishing the desired facts. It was feared 
that they would give up valuable business 
information, that they would give their 
competitors an advantage, and that they 
would furnish information concerning their 
customers which they had no right to sur- 
render. This general attitude of suspicion, 
which existed among business men years ago, prevented 
the organization of business men's associations of all 
sorts, and their cooperation for common ends. Where 
ledger information was exchanged it became an important 
factor in developing a friendly feeling between business 
men and in developing a cooperative spirit among them, 
which was utilized for other purposes. 

Soon after some of the local credit men's associations 
were formed cooperative plans were adopted for ex- 
changing information with reference to debtors. 
With some of the associations the credit clear- 
ing house work of furnishing credit information 
became the prominent feature. In 1900 there 
were credit exchange- systems in six cities: 
Detroit, New Orleans, Baltimore, Cincinnati, 
Sioux City, and Minneapolis. The methods 
of these may be grouped into what may be termed the 
New Orleans and the Minneapolis systems. 

In the former the reports of merchants cover three 
important items: (1) Orders that have been declined 



Exchange 
bureaus of 
local 
credit 
men's 
associa- 
tions. 



SOURCES OF CREDIT INFORMATION 173 

for any reason; (2) merchants who are delinquent in 
their payments or are otherwise unsatisfactory cus- 
tomers; (3) ''attorneys who disregard instruc- 
tions, are slow in reporting or remitting t}^f ^®^ 

11 ,. , . - r M Orleans 

collections, charge excessive fees, fail to system. 

answer letters of inquiry, or are otherwise 
derelict in their duty." Each member was given a 
blank upon which to fill out a report. Each was 
furnished with a number, so that it was unnecessary to 
sign a name to a report. So long as members complied 
with instructions the system was successful, but it broke 
down on account of their lack of interest. 

In the Minneapolis system members were required to 
bring to each meeting lists of those whose orders had 
been rejected and of those whose accounts had j. 
been placed for collection. The reports Minne- 
covered simply these two items. The reports apolis 
were read in open meetings and comments ^^^ ®™' 
were made. Each member had a number which he used 
in making his report. Individuals outside of the asso- 
ciation who reported were assigned numbers, and lists 
were kept of them. With a key to reports each member 
could determine what house had made a particular 
report and then make an individual inquiry. 

The commendable feature of the system consisted 
in its simplicity. The varying success of the different 
methods used by the local associations seems to demon- 
strate that no method can succeed which requires much 
labor to make it effective. 

The simple exchange bureaus organized at first, either 



174 MERCANTILE CREDIT 

developed into more comprehensive systems or else failed 

and gave way to thoroughly organized Credit Exchange 

j^^ Bureaus. These may be divided at present 

classes of into two classes: 1. "A method by which 

bureaus ledger facts and other information are ob- 

^^* tained through the representatives of credit 

departments. 2. A method of entering information 

upon forms provided for that purpose, these forms being 

afterward assembled and a compilation made of all the 

information acquired."^ 

An office is established with suitable filing cases 

and a secretary placed in charge of it. In the first 

method a list is made out of all members of 

The card ^j^^ bureau, and a number is assigned each 

index . . 

system. ^^^' Tins list is furnished all members of 

the association so that when a reference is 
given by number it will be possible for those interested 
to use the list as a key and know at once the other mem- 
bers interested in a given case. Each member is re- 
quired to furnish a list of his customers. A card is made 
out for each of these, and on the card is written the num- 
bers of all those who sell to the purchaser. 

When an inquiry is made concerning the standing of 
a customer of any of the members, the secretary looks 
through the filing case for the customer's card. As this 
contains the numbers of all those who have dealings 
with the purchasers, the numbers are sent to the inquirer. 
By examining his list or key, the inquirer knows who the 
others are who have dealings with his prospective pur- 

1 Prendergast: Funds and Their Uses, p. 207. 



SOURCES OF CREDIT INFORMATION 175 

chaser. These he calls by telephone or he sends a 
messenger to make inquiries of them. The information 
furnished is oral but is taken from the books. Other 
information of a general character may also be obtained. 

One of the commendable features of this method is its 
simplicity. An office that will do the work satisfactorily 
may be maintained at small expense. The one seeking 
information can secure it at once, and in a few hours he 
can have what he desires to know of his purchaser. 

By the second method of credit interchange, written 
reports are furnished those wishing them. A list is made 
of all members of the bureau and a number is ^^^ 
assigned each, the same as in the first method, credit re- 
Inquiry blanks are furnished those seeking P<^'* 
information, and inquiries are made from ^^^ ®"** 
them. If each member seeks information about a large 
number of his customers in course of time the Bureau 
will have nearly all the information its members desire. 

Each morning the secretary of the Bureau assembles 
all the inquiry blanks received. Requests are then made 
for information from all members with whom the cus- 
tomer has had dealings. The blanks call for information 
on the credit standing, the amount owing, the amounts 
due, the methods of payment, etc. This information is 
compiled into a report and furnished the member desiring 
the information. In some bureaus a copy of each report 
is sent to all members. The organization of the office and 
its equipment are in no important respects different 
from that in the first method described. 

The Committee on Mercantile Agencies and Credit 



176 MERCANTILE CREDIT 

Cooperation of the National Association of Credit Men in 

1910 sent questionnaires to all the local credit men's 

„ . . associations to learn to what extent the local 

Extent to . . 

which associations had established credit exchange 

each bureaus, to learn the methods used, and the 

system is extent to which dealings were carried on with 
those outside the associations. Replies from 
thirty having credit exchange bureaus were received.^ 
Of these thirteen used the first method, the card index 
system, while seventeen used the second system, that of 
compiling information. Eleven of thirteen associations 
using the card index system were willing to exchange 
credit information with outsiders, while only four of 
the seventeen that compile credit information were 
willing to furnish information to outsiders. The card 
index system permits dealing with outsiders to a much 
greater extent than the other system, as in the latter sys- 
tem detailed information would have to be furnished 
non-members who contribute nothing to the support 
of the bureau. An exchange of information with 
those outside the bureau is frequently desirable, as 
is the case especially with such mercantile agencies as 
those of the Bradstreet Company and R. G. Dun and 
Company. 

The system of compiling credit information has its 
limitations for another reason. Business houses are 
^jjg still very skeptical about furnishing accurate 

compiling information, to be made relatively general with 
system. reference to classes of customers they are 

^ Bulletin National Association of Credit Men, July, 1910. 



SOURCES OF CREDIT INFORMATION 177 

carrying who are heavily burdened with debt.* 
These customers are often seeking credit with other 
houses and if all the facts were known they might be 
denied credit. The failure to receive credit by such 
houses would often result in their insolvency, a condi- 
tion detrimental to the house which is carrying them 
and which has furnished the damaging information. 

Another obstacle in the way of the interchange of 
credit information consists in the unwillingness of large 
firms with thousands of customers to exchange informa- 
tion with business establishments having only a few custo- 
mers. The larger house would rarely learn anything from 
the ledger experience of the smaller house, while it would 
be a perfect mine of information to the smaller business 
establishments and would be frequently used by them. 

The Committee on Credit Cooperation of the National 

Association of Credit Men was created by an amendment 

to the constitution of that association pro- „ . 

viding for such a committee, passed at its of ledger 

annual meeting at New Orleans in 1910. informa- 

Prior to this the work of credit cooperation *J°^ ^ 

those not 
came within the province of the Committee on members 

Mercantile Agency Service and Credit Coop- of credit 
eration. It has been shown in the chapter exchange 
on Mercantile Agency Service that this com- 
mittee was one of the most active committees of the 
National Association of Credit Men, and that its chief 
interest consisted in promoting the exchange of credit in- 
formation. Both it and its successor, the Committee on 
1 Prendergast: Credit and Its Uses, p. 211. 



178 MERCANTILE CREDIT 

Credit Cooperation, have urged upon members of the 
National Association to exchange ledger information 
freely. As a result of this persistent campaign the 
number of inquiries received by some members of the as- 
sociation has increased to such an extent that they have 
been compelled to employ a clerk whose time is devoted 
exclusively to answering these inquiries. The unfairness 
of recei\4ng ledger information without gi\'ing data in 
return and the danger of breaking down the system of 
exchanging ledger information by those not members of 
bureaus which are organized for this purpose, have 
induced the Credit Cooperation Committee to devise 
uniform blanks to be used by members of the National 
Association of Credit Men when seeking ledger informa- 
tion. When one member of the association wishes 
credit information with reference to one of his cus- 
tomers, it is but fair that he give the man who is to 
favor him with a reply the benefit of his own experience. 
It is, moreover, only by this method of mutual ex- 
change that any results of far reaching importance can 
be secured. 

At the meeting of the National Association of Credit 
Men held in Boston in June, 1912, the Committee on 
Credit Cooperation submitted as a part of its report 
seven rules which were to govern members of the Na- 
tional Association of Credit Men. These rules which 
were adopted are as follows: 

''l. The blank adopted and recommended by the 
National Association of Credit Men for the making of 
inquiries always to be used. 



SOURCES OF CREDIT INFORMATION 179 

"2. Each inquiry shall state the amount of the order 
and always indicate if first order. 

''3. If the inquirer has had previous experience with 
the one inquired on, then the inquiry shall be accompanied 
by a statement of such experience. This encourages 
reciprocal interchanges of experience and views. 

''4. Inquiries are not to be made except on orders 
actually in hand or on open account. If investiga- 
tion is being made with a view to soliciting business or 
collecting an account, a letter explicitly stating this fact 
should accompany the inquiry. 

*'5. It is fundamental that all inquires are to be treated 
confidentially, and under no circumstances divulged to 
the subject of the inquiry. 

^6. All inquiries to be answered on the day received 
and by the credit man or manager if possible, so that the 
ledger experience and any additional information in his 
possession may be furnished. 

"7. A compliance with these rules in this interchange 
of credit experience and information leads to accuracy, 
reciprocation, promptness and confidence. Their obser- 
vance will mean a closer contact between the members 
of this Association, and be of great assistance in their 
credit investigations." 

Other institutions than credit associations are en- 
gaged in credit cooperation. The following organiza- 
tions^ are doing in this line satisfactory work: The 
Jewelers' National Board of Trade, The National Asso- 
ciation of Clothiers, The Electric Trade Association of 

* Bulletin National Association of Credit Men, July, 1905. 



180 MERCANTILE CREDIT 

the Pacific Coast, The Merchants' Credit Association 

of California, The Stationers' Board of Trade of New 

York, The Crockery Board of Trade of New York, The 

Lumbermen's Trade Association, The Glass Dealers' 

Protective Association, The Manufacturers' and Dealers' 

Protective Association and The New York Paint and 

Allied Traders' Association, etc. The work of these credit 

exchange bureaus is very satisfactory, and in many 

respects the best work of this sort is done by agencies in 

a certain trade. 

Personal credit or credit to consumers is usually given 

with less system and wisdom than credit to other classes. 

Many attempts are being made to systema- 

Credit ^j^e credit to consumers by merchants, who 

bureaus of exchange credit information with each other 

retail on the credit standing of their customers. 

mer- The best-developed plans of this class have 

^ ^^ ^ been established by the retail merchants' 
asso- '^ 

ciations. associations of Columbus, Ohio, and Indian- 
apolis, Indiana. The credit system of the 
former was established September, 1911, and of the lat- 
ter about five years ago. The members of the Colum- 
bus Association are sixty-five of the leading merchants 
of the city. A central office is maintained with suit- 
able filing cases, and the secretary of the retail merchants' 
association has charge of the office. The card system 
is used for filing purposes and the information is private. 
Numbers are used to designate persons and a code is 
used in giving the standing of credit applicants. Each 
merchant reports all his credit cases, and a messenger 



SOURCES OF CREDIT INFORMATION 181 

goes out from the central office each day to collect all 
new information. Two girls are employed in a private 
office where the cabinets are placed, using telephones to 
furnish information, when it is requested, to the members 
of the association. Some of the merchants have private 
wires with the office. Whenever a buyer goes to a store 
of a member to make a purchase and asks for credit, if 
his credit standing is unknown, the merchant calls up 
the office, and the desired information is furnished at 
once by telephone. If more detailed credit information is 
desired than is possessed by the office, a credit investi- 
gator is sent out to procure all the information which is 
accessible. For the purpose of obtaining this kind of 
information, the office of the association has established 
relations with many of the banks, manufacturing insti- 
tutions, and other employing agencies where the people 
of the city work. Information is obtained with reference 
to salaries, business prospects, habits of life, etc., of 
those who seek credit. 

The initiation fee of the members of the Columbus 
Association is $50, while the annual dues vary from $100 
to $300 a year, the amount depending on the service 
rendered. The cost of maintaining the Credit Exchange 
Bureau is approximately $5,000. 

The success of this plan depends almost entirely upon 
the organizing ability, the initiative, and the persist- 
ence of the manager of the office, who is in each of the 
above cases the secretary of the retail merchants' asso- 
ciation. In both cities the merchants feel that the main- 
tenance of such an office is an excellent investment on 



182 MERCANTILE CREDIT 

account of the amounts which may be saved by avoiding 
bad debts due to giving credit unwisely. Neither 
association, however, is prepared to prove approximately 
how much is saved in this manner, owing to many con- 
fusing factors in estimating losses. The plans pursued 
in both of these cities are workable in all large cities, 
provided the right kind of ability can be secured in 
managing the general office. 

Retail grocers and retailers in other lines have credit 
exchange bureaus, of which the Retail Grocers^ Exchange 

Bureau of Columbus, Ohio, is typical. About 
Grocers* ^^^ grocers of Columbus maintain a central 
Credit office where records are kept of the credit 

Exchange standing of the customers of the members. 

Each grocer sends a report to the office on the 
credit standing of his customers who are given credit. 
Whenever a new applicant for credit comes to a store, the 
clerk calls up the central office, obtains his credit record, 
and then withholds or gives credit, basing his decision upon 
the information he receives from the central office. The 
great obstacle in the way of an efficient credit exchange 
bureau is the difficulty of getting grocers to furnish to 
the office promptly complete and accurate reports of 
their credit customers. The grocers have been urged to 
withhold credit from all customers who owe debts 
until the debts have been paid, but it has been found 
impossible to enforce this provision. 

The credit exchange bureau may be made most 
serviceable to all business establishments when it is 
made national in its scope. At present there is some 



SOURCES OF CREDIT INFORMATION 183 

interchange of information between bureaus in the same 
territory, such as the Cincinnati, Columbus, and Youngs- 
town bureaus in Ohio: but there is no definitely organized 
system for the exchange of credit information between 
bureaus not in the same territory. 

Unfortunately mercantile credit is at present local 
and not national. Banking institutions are local units, 
each community depending on its own re- q^^^^^ 
sources for funds. The local associations exchange 
exchanging information should extend their national in 
scope and provide an exchange bureau, which °^®' 
would be a clearing house of information for all the 
United States. Then the Bureau would have valuable 
information for all classes of business men. Before this 
end can be consummated it will be necessary to have 
well organized bureaus of exchange in all sections of the 
United States. At present only a beginning has been 
made. Hundreds of communities have no credit men's 
associations at all and no exchange bureaus. All the 
trades, too, should be organized on a national basis. 
There is a business consciousness of kind among members 
of a trade, and a national organization can be perfected 
more easily than the organization of a National Ex- 
change Bureau from the various local organizations repre- 
senting diverse interests. The cooperation of both 
groups is necessary to a great Credit Exchange Bureau 
national in scope. When this is accomplished mercan- 
tile credit will no longer be local but national, and the 
funds of the whole country may be made available for 
carrying on the mercantile business in any community. 



CHAPTER XI 
ADJUSTMENT BUREAUS 

The adjustment bureaus have developed within the 
last decade as credit institutions. When the National 
Association of Credit Men first took formal 
adjust- notice of them at its Memphis meeting in 
ment 1905 by the appointment of a special Com- 

bureaus mittee on Adjustment Bureaus, several local 
^^. associations of credit men were conducting 

adjustment bureaus. After making a thor- 
ough canvass of the work of the various adjustment 
bureaus then in existence, this committee in its report 
to the Baltimore meeting of the National Association of 
Credit Men held in 1906 set forth the fundamental aims 
and objects of these bureaus as follows: 

'l. To investigate, upon request, the affairs of a debtor 
reported to be insolvent and adjust the estate, when 
possible without court proceedings. 

^'2. To secure capable and eflBcient receivers, ap- 
praisers or trustees when court proceedings are found to 
be necessary. 

"3. To secure quick adjustment of all honest failures at 
the minimum cost and with the maximum dividend to 
creditors. 

*'4. To facilitate and economically secure extensions 

184 



ADJUSTMENT BUREAUS 185 

or liquidations when upon investigation it is found to 
be to the best interests of all. 

"5. To influence concerted action by the creditors for 
the benefit of all. 

"6. To assist creditors to acquire for their own use the 
estate of failing or insolvent debtors, when mutually 
agreed upon. 

*'7. To prosecute or assist in the prosecution of the 
guilty party or parties where investigation discloses 
fraud or the intent to defraud.''^ 

The functions of the adjustment bureaus as above 

stated show quite clearly the conditions which gave rise 

to them. When a debtor was in failing 

circumstances there was usually an absence of ^°^^^" 

tions 
concerted action on the part of creditors in- giving 

terested. The debtor^s estate was frequently rise to 
dissipated so that there was little or nothing adjust- 
to be divided when action was taken against j,m.eaus 
him. When receivers, appraisers, and trus- 
tees were appointed, they were frequently incompetent 
and were often friends of the debtor and acted in his 
interests. When attorneys were appointed they often 
had an inadequate knowledge of commercial law, and 
as a rule made excessive charges for their services. In 
general there was an absence of concerted action by 
creditors to protect their own interests, to preserve the 
estates of worthy debtors, and to punish the fraudulent. 

The value of an adjustment bureau may be seen by con- 
trasting its methods with the usual clumsy and expensive 

* Bulletin National Association of Credit Men, July, 1906. 



186 MERCANTILE CREDIT 

methods of procedure in closing an estate. The in- 
vestigation of a failure ordinarily proceeds slowly. Where 
Value of credit exchange bureaus do not exist, the 
adjust- business of a bankrupt may be in very bad 
nient condition before bankruptcy proceedings are 

^®^" * begun. A fraudulent debtor may escape, or his 
assets may be wasted, or his books and other data may 
be missing. Absence of concerted action is frequently 
responsible for delay. Where the failure is not a fraud- 
ulent one, lack of harmony among creditors, and the 
haphazard methods of handling estates, lead to a com- 
promise at a small percentage of the claims. 

The ordinary method of closing estates is harmful 
to the debtor also. The debtor whose liabilities are rela- 
Ordinary lively heavy is always in danger of having 
method of action taken against him by an over-zealous 
closing an creditor. As long as creditors act independ- 
®^ * ®* ently there is always a temptation to hasty 
action and the dissipation of the estate through a mul- 
tiplicity of suits and executions. As soon as action is 
taken by one, others follow in proceeding against the 
debtor's property, and an inventory is taken of it. 
Although the debtor's assets may exceed his Habilities, 
yet for want of sufficient funds to promptly pay his 
debts he may be forced into insolvency or bankruptcy. 
When bankruptcy has been thus precipitated the trustee 
is practically compelled to sell the stock at a discount as 
he sells it under the conditions of a forced sale and this 
together with the costs of closing estates leaves credi- 
tors less than their original claims. 



ADJUSTMENT BUREAUS 187 

Where the adjustment bureau exists if a member comes 
in possession of knowledge that one of his debtors is in 
failing circumstances, he must notify the sec- 
retary of his adjustment bureau at once, ^^^^g ^^ 
The latter calls a meeting of the creditors, closed by 
who carefully canvas the situation. If there adjust- 
are many creditors, a committee of creditors is , 
appointed with power to act, and the foreign 
creditors are notified. An adjuster is usually sent to 
secure a financial statement from the books of the debtor, 
and if necessary he takes an inventory of his property. 
The committee of creditors then acts with full knowledge 
of the debtor's condition, and grants the debtor an ex- 
tension of time if the circumstances seem to warrant it. 
If it is desirable that a trustee be placed in charge, the 
debtor is asked to make an assignment to him, and if he 
refuses to do so, he is made an involuntary bankrupt. 
Appraisers will be selected who have a special knowledge 
of the business and know how to estimate the value of 
the bankrupt's property. If an assignment is made, 
experts or men trained in closing estates are employed. 
Men skilled in collecting accounts and in disposing of mer- 
chandise are appointed, with the result that the bank- 
rupt's property is disposed of at the least possible loss. 
As will be shown later, the costs of closing bankrupt 
estates by adjustment bureaus are much less than by the 
ordinary methods. Only when it is absolutely necessary 
are debtors required to make assignments. Those with 
small as well as large accounts and the foreign as well as 
the local creditors, are all treated alike. 



188 MERCANTILE CREDIT 

The plan of organization of adjustment bureaus varies, 
but all of them pursue practically the same methods. 
The active work of the bureau is in the hands 
Plan of q£ gj^jjgj, ^]^Q secretary, manager, or both. 
^Qjj^ A firm of attorneys is usually retained, and 

their fees are definitely limited by the bureau. 
When the bureau serves a creditor upon his request, he 
alone pays the expenses. When it serves all the creditors 
of a debtor, the expenses are divided among them. A 
creditor in a remote section of the country can get a 
bureau to take up the case of a debtor residing in its 
district, and then give no further attention to it. The 
bureau^s attorneys on account of wide experience are 
usually experts in handling claims, and the creditor, 
wherever he resides, is assured superior ability in looking 
after his interests. 

The question has been raised frequently in the annual 

conferences of the National Association of Credit Men as 

to whether the adjustment bureaus should 
Should , . n ^• 

adjust- become m any sense collection agencies. 

ment Previous to 1912 some of the bureaus had made 

bureaus a practice of collecting claims, and much op- 
position had arisen against this policy. Those 

nCCOUIllS* 

in favor of the bureau^s undertaking this work 
claimed that in certain sections of the country it could 
perform the best service to its members by collecting ac- 
counts. Those opposed to this policy contended that 
the function of the bureau was to investigate a debtor's 
financial condition, and, where he was solvent but in 
failing circumstances, to preserve his business, if possible, 



ADJUSTMENT BUREAUS 189 

from failure; to act as trustee of his estate, where his 
success was hopeless, to manage it economically, and to 
preserve as much of it as possible for distribution. It 
was further insisted that an association of credit men 
should keep itself free from commercialism and it should 
make it obvious to the critics of the Association that a 
credit men's association is not organized for the purpose 
of enforcing the payments of claims due to its members; 
and that if it is to carry out the ideals of the National 
Association of Credit Men, that of being an institution to 
serve the general purposes of credit men, it should keep 
itself free from the taint of commercialism, which would 
inevitably follow the collection of specific debts. It was 
finally decided at a conference of adjustment bureau 
managers held in Chicago in 1912, and at the National 
Conference of Credit Men of the same year, that the ad- 
justment bureau should "not handle delinquent ac- 
counts for collection as bureaus, nor should the managers 
or commissioners of such bureaus handle such delinquent 
accounts in their official capacity.^' 

The policy to be pursued with reference to the noti- 
fication of creditors when a debtor's affairs are under 
consideration has often been a mooted ques- 
tion. Some favored the notification of those ° ,.J 

creditors. 

only who were members of adjustment bu- 
reaus, while others favored the notification of all credi- 
tors. Those in favor of the former policy insisted that 
creditors not members of any bureau might not be in 
sympathy with the work of the bureaus and consequently 
might give their claims into the hands of attorneys or 



190 MERCANTILE CREDIT 

collection agencies, a procedure which would thus in a 
measure defeat the ends of the bureau that had the 
matter in charge. It was definitely decided by the 
National Association of Credit Men at its annual confer- 
ence in 1909 that if any creditor should be notified, all 
should be notified regardless of their membership in 
bureaus. 

There are three methods of organization of adjust- 
ment bureaus: 1. *'the corporate form, in which stock- 
Three holders are limited to members of a local asso- 
methods ciation, and the management is in the hands 
of organ- of a salaried employee; 2. the general corpo- 
rate form, in some cases without the stock- 
holding feature, with the management in the hands of 
an attorney employed on the fee basis, he at the same 
time being actively engaged in the general practice of the 
law; 3. the committee form of management, a committee 
composed of representative members handling each case 
on its own merits, engaging such assistance, legal and 
otherwise, as may be deemed necessary. "^ 

It would seem that the work can be carried on more 
successfully by the first method, as a salaried employee 
of ability interested in the work of the association can 
give much more effective services than either an agent 
hired from without or a committee which must from time 
to time employ legal talent. 

The relation between the National Association of 
Credit Men and the bureaus of the local associations 

1 Bulletin National Association of Credit Men, July, 1910, 
p. 510. 



ADJUSTMENT BUREAUS 191 

have all along been mooted questions. At the Chicago 
meeting of the National Association of Credit Men it 
was decided that the adjustment bureau of a 
city should be affiliated with the local associa- Relation 
tion of its district to be recognized by the National 
National Association of Credit Men. ^ It was Associa- 
further decided that a uniform style of name *ion of 
should be adopted by each adjustment bureau; ^ ^ 

viz., Adjustment Bureau of the bureaus. 

Association of Credit Men. The advisabil- 
ity of appointing an agent in the office of the National 
Association to have supervision of the local association 
was recommended. Opposition arose to too close a 
supervision of the local bureaus by the National Asso- 
ciation, and it was finally concluded that the super- 
vision should be general in character only and that each 
local bureau should be permitted to solve its own local 
problems. 

As a rule the charges of the bureau go to the treasury 
of the local Credit Men^s Association, and become a fund 
to bear the expenses of the bureau. These income 
charges are uniform to all members of the from ad- 
National Association of Credit Men and its justment 
affiliated branches and are not to exceed 10 
per cent, of the amount to be distributed to creditors 
except for unusual services. In some local associations 
the fee is limited to 5 per cent, of the dividends for ser- 
vices as trustee, while a higher charge is made to 
outsiders. 

* Bulletin National Association Credit Men, July, 1907, p. 425. 



192 MERCANTILE CREDIT 

In another association the adjustment bureau employs 

an auction house to handle the stocks of bankrupts. The 

goods of the bankrupt are not sold in bulk at 

Use of ^ sacrifice, as is usually the case, but are 

auction 

house. broken up in small lots and sold at retail, the 

auction house handling the goods at 10 per 
cent, commission. In this way much more is realized on 
the stock. The adjustment bureau may fix a minimum 
price on the goods, and if this is not secured the auction 
house will purchase them, after which they are sold in 
the usual way. When this method is pursued creditors 
do not need to wait till the goods are sold but receive a 
portion of the sum due them at once; and later when the 
stock is disposed of, they receive the balance due them 
in the form of dividends after the agent receives his share. 
The experience of all the associations which have ad- 
justment bureaus shows that estates can be closed by 

„ . the bureau at a much lower cost than that re- 
Expen- 

ence in the Quired when they go through the regular bank- 
economic ruptcy proceedings. The Adjustment Bureau 

closing of Qf ^jjg LQg Angeles Credit Men's Association 
estates 

during the year 1909 received from estates 

$460,140 and returned to creditors in dividends $422,722, 
the average settlement being 55.85 per cent. The hand- 
ling of half a dozen cases in which there were no assets 
reduced the average percentage returned to creditors. In 
1908 the dividends returned to creditors were over 60 per 
cent, of the liabilities. ^ The Chicago Adjustment Bureau 

^ Bulletin National Association of Credit Men, March, 1910, 
p. 141. 



ADJUSTMENT BUREAUS 193 

returned to creditors over 60 per cent, of the liabilities of 
insolvency cases at the end of the first six months of 1909. 
In 1909 the Spokane Bureau^ received in claims $275,000 
and paid to creditors 58.8 per cent, of their claims. The 
Denver Adjustment Bureau/ the first to be organized, 
made its seventh annual report October 1, 1910, and the 
expenses on adjustment were 2.9 per cent, of the funds 
collected. The report shows that twenty-nine cases were 
handled, and the creditors received 41.3 per cent, on lia- 
bilities. All creditors, whether local or foreign, whether 
members of the association or not, receive the same atten- 
tion, as it is the policy of the Denver Bureau to place all 
claims on an equal basis. The bureau's success has been 
such that during the eight years of its existence but little 
business has been turned over to the bankruptcy court in 
its territory. The reports of the various bureaus show 
that in insolvency cases creditors receive from 30 to 60 per 
cent, of their claims, whereas in insolvency cases handled 
by other agencies creditors receive far less — amounts not 
exceeding on the average 25 per cent, of the liabilities. 
The adjustment bureaus accomplish this saving by 
selling goods at greater advantage, by a better system of 
collecting book accounts, by eliminating the excessive 
charges of attorneys, trustees, etc., and by a prompt 
settlement of estates. However, a number of these ad- 
justment bureaus charge membership fees which help to 

^Bulletin National Association of Credit Men, March, 1911, 
p. 166. 

2 Bulletin National Association of Credit Men, February, 1910, 
p. 107. 



194 MERCANTILE CREDIT 

defray the expenses of the bureaus. Where the adjust- 
ment bureau is operated in conjunction with a credit ex- 
change bureau, as is the case in thirty-four of the forty- 
four adjustment bureaus, a great force is exerted to 
prevent failures by forcing settlements before estates get 
into a desperate condition. 

Adjustment bureaus are widely distributed throughout 

the country but are more numerous relatively in the West. 

There are twenty-two bureaus on each side 

Distribu- ^f ^j^g Mississippi river. ^ Of those east of 

tion of 

bureaus. "^^^ Mississippi river, nine are south of Mason 

and Dixon^s line, eight are in the Middle 
West north of the Ohio river, and five are in the Middle 
Atlantic States. Of the five in the Middle Atlantic 
States, Pennsylvania has four and New York one. 

The special committee on adjustment bureaus of the 
National Association of Credit Men made an extensive 

report on adjustment bureaus at the annual 

ences of meeting at Philadelphia in 1906. Beginning 

adjust- with the 1907 annual meeting, the Adjustment 

ment Bureau Committee has been a standing com- 

^®^" mittee of the National Association of Credit 
managers. 

Men and one of the very active committees 
of that body. Since then there has been an annual 
meeting of the officers of the adjustment bureaus of the 
country, the first one meeting in Cleveland, Ohio, in 1907 
and the last one meeting in Chicago, 111., in January, 
1913. 

1 Bulletin National Association of Credit Men, July, 1912, 
p. 592. 



ADJUSTMENT BUREAUS 195 

At the Chicago conference of adjustment bureau man- 
agers in 1912, the following "rules and principles of con- 
duct for adjustment bureaus connected with affiliated 
branches of the National Association of Credit Men*^ were 
adopted. As these were also adopted by the National 
Association of Credit Men at its conference held in 
Boston in June, 1912, they represent a late development 
in adjustment bureau policy and method. 

*'l. The adjustment bureau to be established by and 
under the absolute control of the local association of 
credit men. If the local association is in- 
corporated, it may be optional with that asso- ^^^^^^ ^^ 
ciation whether the adjustment bureau be tions. 
separately incorporated. If the local associa- 
tion is not incorporated, it is suggested that the adjust- 
ment bureau be separately incorporated and governed 
by a board of directors selected by the local association; 
if not incorporated, governed by a committee appointed 
by the local association. 

^'2. Adjustment bureaus are primarily established for 
the benefit and service of the members of the National 
Association of Credit Men and its affiliated branches for 
the saving of expense in administering solvent and in- 
solvent estates in which they may be interested; but such 
bureaus shall not handle delinquent accounts for collec- 
tion as bureaus, nor are the managers or commissioners of 
such bureaus to handle such delinquent accounts in their 
official capacity. 

'3. A delinquent account within the meaning of Rule 
2 is one that is considered uncollectable upon present 



196 MERCANTILE CREDIT 

demand, and is not placed for the purpose of investigation 
or adjustment. 

"4. The adjustment bureau is to be operated by a 
manager or commissioner selected by the governing 
committee or board of directors. 

"5. Each adjustment bureau shall have an adjuster, 
who may be the manager, commissioner, or one of his 
assistants. He shall make investigations at the request 
of any member of the association at a compensation not 
to exceed $15 per diem and expenses. 

" 6. In the absence of other agreement, should the ad- 
juster discover upon investigation that the affairs of a 
debtor or debtors need general adjustment, then the 
adjustment bureau which the adjuster represents 
shall, without further instructions, proceed to the ad- 
justment of the debtor or debtors' affairs for the benefit 
of all creditors; in which event, the expenses of the in- 
vestigation shall be pro rated against all claims handled 
by such bureau, unless otherwise provided for. 

" 7. If the estate to be adjusted or liquidated is located 
in a city where an adjustment biu-eau is located, and 
where there are other creditors of the estate in interest, 
there shall be cooperation between the bureau where the 
estate is located and the originating bureau; but if the 
estate is not located in such city, then the adjustment is 
to be made under the supervision of the bureau where the 
adjustment originated. 

" 8. The manager or commissioner of the adjustment 
bureau where the investigation or adjustment originated 
is to advise immediately the managers or commissioners 



ADJUSTMENT BUREAUS 197 

of all adjustment bureaus where creditors are located, 
and also all creditors. He shall also suggest to the 
creditors that it is preferable that claims be forwarded 
through the local adjustment bureau, or that creditors 
can forward claims direct. The local bureaus shall be 
kept fully advised by the operating bureau of the prog- 
ress of the case. 

'' 9. An allowance not exceeding one-third of the com- 
missions charged on claims is to be allowed the bureau 
on such claims as are forwarded by that bureau or sent 
direct. 

'^10. The adjustment bureaus are formed not to make a 
profit, but for economical administration for the benefit 
of those interested — therefore all charges shall be rea- 
sonable, the schedule of charges adopted by each adjust- 
ment bureau to be filed with the national oflace, and with 
the chairman of the Adjustment Bureau Committee. 

"ll. A committee consisting of the chairman of the 
National Adjustment Bureau Committee, and one 
member thereof, two adjustment bureau managers, 
and the secretary-treasurer of the national association, 
shall constitute a committee of complaint to arbitrate 
all complaints between adjustment bureaus or between 
members and bureaus, and the decision of a majority 
of such committee shall be binding upon all parties in 
interest, and such decision filed with the national asso- 
ciation's committee. 

" 12. Reports, at least quarterly, shall be furnished the 
national office of the estates adjusted in each of the 
local adjustment bureaus." 



198 MERCANTILE CREDIT 

The adjustment bureau managers at their recent con- 
ference in Chicago, January, 1913, took a decided stand 
for uniformity in operating adjustment bureaus. It 
was contended, however, that as some bureaus had been 
organized for years it would be inadvisable to attempt 
to enforce a uniform operating plan, but that uniformity 
and a high standard of bureau efficiency could be gradu- 
ally secured by a system of cooperative supervision. 
To carry out this program it was recommended "that 
the country be divided into seven zones, and that in 
each zone there be appointed a committee of not less 
than three nor more than five whose functions it will be 
to have the direct oversight of the bureaus in each zone, 
to investigate complaints, to arbitrate disputes, and to 
bring about a cooperation of the work in each zone. 
These committees should be appointed by the National 
Committee on Adjustment Bureaus and the National 
Secretary and Treasurer subject to the approval of the 
national president. The committees should be respon- 
sible to the National Board." The adjustment bureau 
managers recommended further that every local associa- 
tion of credit men should organize an adjustment bureau 
upon plans approved by three committees, the zone com- 
mittee, the national committee on adjustment bureaus, 
and the advisory committee of the board of directors on 
adjustment bureaus. It was moreover recommended 
that no new bureau should be organized without the 
approval of the above named committees, and that the 
zone committee should withdraw its official sanction 
from any bureau which was not properly conducted. 



ADJUSTMENT BUREAUS 199 

The report of the adjustment bureau managers will 
be submitted to the National Association of Credit Men 
this year for adoption. This report represents the latest 
development in adjustment bureau work. It is believed 
that the supervision proposed, if put in practice, will 
enable the bureaus in each territory to work in better 
harmony, to standardize their methods, and to do a much 
higher grade of work than has been done heretofore. 



CHAPTER Xn 
COLLECTIONS 

As the success of a credit department depends in 
great measure upon its collection service, every thor- 
oughly developed credit department has a 
of collec- well-organized division of the department, or 
tions to an adjunct to the department, devoted to 
the credit the collection of accounts. The work of 
®^ " granting credit is completed only with the 
collection of the accounts created by the 
credit department. Whether this work falls within the 
province of the credit man, his subordinates, or some 
allied department, the collection service should be closely 
related to the credit department, as the efficiency of the 
latter is measured by success in making collections. 
The purpose of the credit department is to prevent 
losses, and if accounts are not collected the credit depart- 
ment is a failure. 

The kind of ability needed to make collections is 

often different from the qualifications demanded for a 

credit man. The manager of collections 

Qualifica- jj^^g^ be a good judge of human nature, and 
tions of a o - c 

collector. ^^ should possess the diplomacy which will 

enable him to handle successfully the great 

variety of credit cases with which he must deal. The 

classes of creditors determine largely the policy to be 

200 



COLLECTIONS 201 

pursued. The most desirable creditors require but little 
effort to make collections. However, if a business were 
limited alone to these, a strong credit department 
would be unnecessary and but little cost would be 
entailed in making collections. Under present day 
competitive conditions credit must be extended to all 
classes, to the doubtful as well as to the safe credit 
risks; and the manager of collections must have as 
varied qualifications, although of a different kind, as the 
credit man himself. 

All are agreed that the first essential to successful 
collections is to call for payment when an account is due. 
No debtor can object to being called upon to 
carry out his agreement to pay a debt, and in rompt 
general debtors are inclined to pay promptly tjo^s. 
when called on to do so. Moreover, careless- 
ness in collecting tends to develop habits which demor- 
alize debtors and make collections diflicult. 

As most collections are made by mail, a system which 
will enable the collection office to take up promptly and 
to handle properly all accounts is necessary office 
to every large business which deals extensively system to 
in credits. Various systems of card indices follow col- 
are in use. A common method is to place 
each credit account on a separate card. The card has 
blank spaces for the name, rating, address, terms, date 
of invoice, the amount of debt and when the account is 
due. Some cards have also blank spaces to indicate when 
a draft is made out for collection and when it is returned, 
to give the comment of the debtor and a record of the 



202 MERCANTILE CREDIT 

final disposition of the account. These cards are kept 
in a tickler and so arranged that the one who has charge 
of collections can turn at once to the cards having records 
of accounts due on a certain day. If for certain reasons 
the collection of some of these accounts is to be postponed 
to later dates, the proper entries are made on the cards, 
and they are placed with others which are due on the 
same designated dates. By this system all the accounts 
may be properly handled when due, and with little 
effort the one who has charge of collections may know 
when and in what order the accounts of a business become 
due. 

While this system is advantageous to most businesses, 
in many, especially the smaller concerns, the one who 
Advan- ^^^ charge of collections reUes on the informa- 
tages of tion he can obtain directly from the ledger 
an office from day to day. Others depend on their 
ys em. memory or on note-book memoranda and con- 
sult the ledger when other methods fail. While the 
keeping of credit reference and collection cards takes 
time, this work can be done by subordinates; and as the 
tickler may be placed on the desk of the one who has 
charge of collections, the information he desires is at 
hand on a moment's notice. If he depends on his ledger 
for information he must often go into an adjoining 
room to consult it, and while he fails to economize his 
own time he disturbs the work of the bookkeeper or 
accountant. 

In the retail business the practice is general of making 
collections the first of each month by rendering state- 



COLLECTIONS 203 

ments to debtors. Of all accounts these are perhaps 
the easiest to collect. Consumers as a class receive 
credit with the expectation of paying their ^ . .. 
bills by checks the first of each month, and methods 
retailers grant credit under the assumption of 
that payments will be made promptly at the collecting 
close of the month. Many of the latter pre- 
fer to have payments made in this way rather than by 
cash. Most of the accounts rendered are itemized, and 
after the account is returned to the seller accompanied by 
a check it is again returned to the purchaser, receipted. 
When goods are delivered, an itemized statement is 
usually sent with the package. 

Instead of sending accounts by mail some firms em- 
ploy collectors to visit debtors to make collections. 
These collectors present a statement of the account to 
the debtor, and if the latter pays at once either in cash 
or by check, the collector receipts the bill in the name 
of the firm and gives it to the debtor. Whatever 
advantages this system may give to the business houses 
that employ collectors, debtors prefer to receive state- 
ments of accounts through the mail and to pay by 
check. 

Accounts may be divided into (1) live and (2) tardy 
accounts. A live account is one which is just due, or 
one which is not yet due, while a tardy ac- Two 
count is, as its name implies, one that is over classes of 
due. It is the latter class of accounts which accounts, 
receives attention in any consideration of the subject of 
collections. 



204 MERCANTILE CREDIT 

The consideration of live accounts is important be- 
cause if they receive adequate attention much less effort 
will be necessary to collect tardy accounts, 
accounts ^^^^ ^^ account is due it should be collected 
promptly unless there is a good reason for 
granting further time to the debtor. However, before 
an account matures the creditor should know how his 
debtor is treating other accounts, for slowness in making 
payments is the first danger signal. If the debtor is 
slow in paying other accounts, the creditor has every 
reason to believe that he will be slow in paying his 
account, and business failures are almost invariably pre- 
ceded by a period of tardiness in paying debts. 

When a debtor is slow in making payments, the cred- 
itor should investigate at once the causes of his tardiness. 
Causes of ^^ *^^ various factors responsible for business 
delay trouble the debtor himself is directly respon- 

i^ ^ sible for some of them, while others arise from 

paying. causes over which he has no control. To 
act wisely the creditor should have a correct interpre- 
tation of the situation. While creditors must count 
on debtors paying their obligations, the embarrassed 
debtor must rely on the assistance of merchants who will 
sell to him if he is ever to recover from his embarrass- 
ment. At this point the creditor has an opportunity 
for the exercise of superior judgment. Many worthy 
debtors have been made bankrupts by the rash actions 
of their creditors in collecting accounts, who if leniency 
had been shown, could have recovered and become 
prosperous. Upon the other hand, through the free 



COLLECTIONS 205 

granting of credit and through the failure to make col- 
lections promptly, many debtors have developed habits 
of slow payment and loose habits of business in other 
respects, which have resulted in insolvency. 

As soon as accounts are due debtors receive statements 
of the account with request for payment. It is chiefly 
to obviate the failure to present claims for 

payment when due that systems of collection l[ , , 

1 . , TT / 111 method of 

are devised. However, few would advocate collecting. 

the following of the same system or the 
same routine in all cases when debtors fail to pay at 
maturity. A system planned with the view of treat- 
ing all debtors alike is a faulty system. Differences 
in customs and practices of different trades and busi- 
nesses and differences in personality, must be regarded 
especially in the initial stages of tardy accounts. Before 
more drastic methods are pursued such as the sending 
of drafts for collection, putting accounts in the hands 
of collectors, personal letters are usually sent to debtors 
inquiring why the payment is not made and urging that 
the debt be paid promptly. If the customer is a desir- 
able one, care is taken not to lose his trade by offending 
him. If drastic action must be taken, it is usually 
assumed that the customer is lost to the creditor. 

Perhaps the most common way of making collections 
from delinquent debtors is by the draft. The sending of 

a statement to a debtor when his account ^, , , 

The draft, 
matures is the first step taken to collect a 

debt. The use of a draft to collect is ordinarily the next 

step. The time which elapses between the sending of a 



206 MERCANTILE CREDIT 

statement and a draft varies with the business practices. 
Some mail a draft at once as soon as the creditor learns 
that a check did not come by return mail. This is, 
however, unusual, as creditors ordinarily make allow- 
ances for delays and some even go so far as to exhaust all 
other means in the way of sending statements repeatedly 
and accompanying their statements with letters to the 
debtor, before a draft is sent for collection. 

When a draft is used it is either given to a local 
banker to be sent by him to a bank for collection in the 
community where the debtor is engaged in business, or it 
is sent directly by the creditor to a bank in the debtor's 
city. If it is sent by the latter method, a letter of 
instruction is usually enclosed with the draft in which 
the banker is directed to collect at once and remit the 
proceeds or to return the draft giving reasons why the 
debtor refused to pay. At the time the draft with the 
letter is sent to the banker, a communication is usually 
sent to the debtor, telling him that a draft for a given 
amount has been placed in the hands of a banker, and 
directing him to pay the debt to the banker. If the draft 
is placed in the hands of the creditor's bank, the latter 
sends the draft with instructions to a bank in a commun- 
ity where the debtor lives, and this bank notifies the 
debtor that a draft has been placed there for purposes of 
collection. When collections are made, banks deduct a 
small fee for the service rendered before sending the funds 
to the creditor. When collections are not made, banks 
do not receive fees for the service they render only in 
the exceptional cases where creditors mail a small fee 



COLLECTIONS 207 

with the draft to pay bankers for their service whether 

payment is made or not. 

The collection agency draft system was devised by 

collection agencies to facilitate the collection of small 

amounts by drafts. To these drafts are _, 

TI16 col- 
attached stubs directing banks to place the lection 

drafts in the hands of attorneys named on the agency 
stubs, in case payment is not made to the **'^^* 
bank. This method has the merit of showing 
the debtor as soon as it is presented to him that if he fails 
to make payment the draft will be placed immediately 
in the hands of an attorney for collection. Most debtors 
are thus coerced into paying, not desiring to be confronted 
with the action of an attorney to collect the debt. How- 
ever, the system has its demerits on account of the drastic 
action which is threatened. The credit of debtors 
suffers in the minds of bankers when they observe the 
extremes to which creditors are inclined to go to collect 
their debts. It may be safely stated that in many cases 
where these collection agency drafts are used the credit 
of debtors does not warrant the depreciation caused by 
the use of these drafts. 

When debtors fail to pay drafts when presented, the 
next step is to use the collection letter. At first a mild 
letter is written requesting payment, and after 
this each succeeding letter demanding pay- . ^ ^^ 
ment becomes stronger. At present a series 
of collection letters is prepared by collection agencies 
in the order named and sold to creditors. When 
these letters are sent to debtors they are accompanied 



208 MERCANTILE CREDIT 

by envelopes having printed on them the names of 
the collection agency, and they consequently impress 
debtors with the idea that they have been placed in 
the hands of an outside agency for collection. Many 
debtors respond more quickly in making payments on 
this account. This is the psychology of the collection 
letter. 

Many systems of collection letters are used. Trade 
organizations used the collection letter before it was 
produced and sold by private agencies to creditors. 
These are used now by many trade organizations, and 
also by some credit men's associations. One system 
requires members who use the collection letters to 
notify the agency or collection bureau of the progress 
in collecting an account, and if payment is not made it 
takes active charge of the account. The collection 
letter is ordinarily used only when the future trade of 
the debtor is not considered a matter of importance and 
no care is taken to avoid offending him. 

After all other means have been exhausted the attorney 

is resorted to as the last resource in making collections. 

When an attorney is called in it is usually 

Attorneys decided to enforce the collection of the account. 
as col- 
lectors. '^^^ policy of resorting to this method varies 

widely. Some resort to a method of enforce- 
ment soon after an account becomes delinquent, while 
others defer such drastic action as long as it js possible to 
do so. The costs entailed by the employment of an 
attorney are one reason for deferring this action. 

When an attorney must be employed to collect an 



COLLECTIONS 209 

account, there is often some question as to whether the 
debt can be collected or at least collected in full. This 
tends to make the creditor hesitate. The attorney 
must usually content himself with collecting the debt on 
the installment plan, else he must bring legal action to 
enforce a payment. Ordinarily, creditors prefer the 
partial payment plan if the debt will be paid in full to 
the legal action plan, in which the costs of collection will 
be greater, and in which there will be some risk of not 
receiving the payment of the debt in full. 

To facilitate the employment of suitable attorneys in 
a community at a distance from the place of business of 
the creditor, attorneys' lists are furnished by publishing 
companies. These are responsible companies with repu- 
tations to maintain, and they endorse the attorneys on 
their published lists. Some of these companies guarantee 
to their subscribers the accounts collected by the attor- 
neys on their lists. In these cases the lists are known as 
"bonded lists" and the attorneys as "bonded attorneys." 
Some of these companies, as a condition of being held re- 
sponsible for the amount the bonded attorney collects, 
require the subscriber to report at once the employment 
of such an attorney. 

Some large firms doing an extensive credit business 
make their own lists of attorneys who are employed in 
adjusting their accounts. They prefer to investigate 
themselves the standing and character of all the attorneys 
they employ in the various communities where they do 
a credit business. This method is possible only with 
large firms. Some do not employ local attorneys but 



210 MERCANTILE CREDIT 

send their own attorneys to communities where their 
services are needed. The advantage of the latter system 
is that the business house has full knowledge of the man 
who is entrusted in making collections. By the latter 
method there is some disadvantage in unfamiliarity with 
local conditions, and in some instances in an increased 
cost in collecting debts. 



CHAPTER XIII 

MERCANTILE CREDITS AND 
DEPRESSIONS 

It will be the aim of this chapter to trace the influence 
of one force — mercantile credits — upon depressions and 
crises. MacLeod states the purpose of credit 
'Ho be the temporary advance or creation of ^. 
capital, to promote an operation which is 
expected to repay the capital employed in its promotion, 
as well as certain profits, within a defined period."^ 
From this statement of the purposes of credit it will be 
seen that it is connected with business transactions which 
are more or less speculative in character, and when credit 
is created that cannot be sustained, commercial houses 
fail. Commercial relations are so interwoven and com- 
mercial factors are so interdependent that one great 
failure may bring about a multitude of others, with 
losses of suflficient proportion to precipitate a crisis. 

Mercantile institutions are at the present time so 
organized that it is impossible to do business on a cash 
basis. The question as to whether a cash is better than 
a credit system is not pertinent so long as we have not 
learned to buy and sell for cash. Our present credit 
system has developed as a part of our present industrial 

* MacLeod: Theory and Practice of Banking, p. 252. 

211 



212 MERCANTILE CREDIT 

organization, and it is futile to discuss how things would 
be if our industrial system were different. 

Mercantile credit consists in the advancement of goods 
or commodities for a stipulated period, with the under- 
standing that the seller has a right of action against the 
purchaser at the expiration of this period. Mercantile 
credit is granted when the seller beheves that the pur- 
chaser will be able to pay at the expiration of the term of 
credit. The theory underlying mercantile credit is that 
the buyer will pay for the goods advanced from the pro- 
ceeds of their sale ; and the term of credit is in theory the 
period required to sell the goods and realize on them. 
When the goods are of such a character that a long 
time is required to sell and to realize on them, then a 
long term of credit prevails. 

In distribution, goods may pass through the hands of 
the following distributors: 

1. The grower or importer. 

2. The manufacturer. 

3. The wholesaler or jobber. 

4. The retailer. 

5. The consumer. 

The first four of these use goods as capital, and the 

fifth must pay an amount for them adequate to cover the 

original cost and the profits of all the dis- 

anne s tributing factors. As business is now organ- 
01 distn- 
bution. ^2®^ ^^ is impossible for each of these factors to 

advance the capital necessary to carry on its 

function and wait until it is rewarded from the profits of 

its investment. The manufacturer must invest in a 



MERCANTILE CREDITS AND DEPRESSIONS 213 

plant and then wait a considerable length of time until 
the product is produced, sold, and paid for, before he 
realizes on his investment. The wholesaler buys from 
the manufacturer or grower and sells to the retailer, but 
realizes nothing upon the capital invested in the goods 
until they are sold; if the goods are sold on time, which is 
often the case, he must wait often several months before 
the goods are paid for. The retailer buys of the whole- 
saler and realizes nothing until his goods are bought and 
are paid for by the consumer. These distributors either 
must have capital to conduct their business until the 
product is sold, or else have capital advanced until they 
realize on their sales. By having the capital advanced 
temporarily they greatly extend their business. It is to 
perform this function that banks of discount have 
developed. 

A credit may be recorded as a simple book account, 
as a bill of exchange, as a promissory note, etc. A 
creditor may secure an advancement of capital Methods 
upon a debt expressed in the last named form, of giving 
The manufacturer who sells goods to the mercantile 
wholesaler on time accepts a promissory note ^^® ^ ' 
from him, and with this he secures an advancement of 
capital from his banker by selling the note. The whole- 
saler is then under obligation to the manufacturer's 
banker for the payment of the note, but in event of failure 
to pay, the manufacturer is responsible. The whole- 
saler may sell the same goods to a retailer on time and 
receive a promissory note from the latter for the amount. 
The wholesaler has this discounted by his banker, to 



214 MERCANTILE CREDIT 

whom the retailer must pay the debt at the expiration 
of the term of credit. In the exceptional cases where 
the consumers give notes, the retailer may sell to the 
consumer, accept his note and have it discounted at 
bank, where the consumer must pay the debt when due. 
Two persons are responsible for the payment of each 
of these notes. For the payment of the note dis- 
counted by the manufacturer's banker, both the whole- 
saler and manufacturer are responsible; for the payment 
of the note discounted by the wholesaler's banker, the 
retailer and wholesaler are responsible; while for the 
payment of the note sold to the retailer's banker, both 
the consumer and retailer are responsible. 

It is usually assumed that it is perfectly safe to advance 
money upon notes which are to be paid from the sale of 
goods, as there is real property in existence to be used 
for the payment of the notes. In the above assumed 
case, however, money is advanced in purchasing notes 
to the extent of approximately three times the value of 
the sales; or if we omit the loan of the retailer, as the 
instance is an exceptional one, money is advanced to 
twice the amount of the sales. The price paid by the 
consumer for the goods must cover the entire costs, 
together with the profits of the distributors. The 
failure of the wholesaler, retailer or consumer to pay 
might make it impossible for all of them to pay, in which 
case at least two of the bankers would lose to nearly 
twice the value of the goods. In the case assumed three 
bankers advanced capital, each to the extent of a par- 
ticular sale. In an industrial center frequently a banker 



MERCANTILE CREDITS AND DEPRESSIONS 215 

advances capital to the manufacturer, wholesaler and 
retailer for the sale of the same goods. In event of failure 
in these cases the burden of losses is more concentrated. 
Our confidence in the security of these loans is quickly- 
dispelled when we reflect that there is often twice as 
much money in outstanding notes as there is property 
to represent it. These observations will at least go to 
show that the advancement of capital by bankers must 
be based upon the honesty, integrity, and business 
sagacity of borrowers rather than upon the character of 
the individual transaction upon which the capital is ad- 
vanced. In times of normal prosperity the likelihood 
of loss to the bank is not great, as two persons are 
pledged to the payment of each note. Of course, in 
case of a collapse of a business house, losses are likely to 
fall on the bank with which the house deals, as it is ex- 
tremely improbable that all its obligations are so secured 
that no losses to the bank result. With the collapse of 
a business house, others are certain to be caught in the 
ruin, and then the general security of these houses 
alone prevents a disastrous reaction upon the business 
community. 

Merchants who conduct a safe business are compelled 
to keep funds on hand to tide them over emergencies 
when they rise. A wholesaler usually sells 
largely on credit, and when his debtors fail to tr^d'" 
meet their obligations at maturity, if he pos- 
sesses no surplus capital, he becomes unable to meet his 
own obligations and is confronted with bankruptcy. 
Trading up to the limit of one's means, or trading without 



216 MERCANTILE CREDIT 

holding in one's possession a sufficient amount of capital 
to tide over emergencies, is overtrading. When his 
debtors fail to meet their obligations, the wholesaler is 
often forced to have his bills or notes discounted even 
when the rates charged are exorbitant. With him there 
are but two options, high interest rates or bankruptcy. 
When the financial condition of a merchant becomes pre- 
carious, his banker, as a means of self-preservation, be- 
comes conservative. It is often within his power to save 
or ruin the merchant. He may save himself by permit- 
ting the merchant to be ruined, or if he grants credit 
to a merchant who has over-traded, he himself runs the 
risk of being involved in the ruin of the merchant. A 
happy set of circumstances may so prevail that a mer- 
chant may over-trade for years without suffering loss. 
However, losses may come to him which will cause his 
ruin through (1) unfortunate business accidents of debt- 
ors, (2) granting credit to unworthy business men, and 
(3) general reverses in business conditions. 

The statistics of banking and commercial failures 
during the last thirty years furnish a very instructive 

, „ obiect lesson on the general causes of failures. 

Influence _^ . . , ^ . . . ^. . r ^ 

of rising Durmg periods of rismg prices credit is freely 

and falling sought and as freely granted. The incentive 
prices on ^^ realize wide margins leads traders to ex- 
tend their credit as far as possible and to 
make the utmost use of their capital. While prices are 
rising and trade is brisk, the wholesaler orders freely 
from the manufacturer and enlarges his stock with the 
hope that larger margins may be realized by still higher 



MERCANTILE CREDITS AND DEPRESSIONS 217 

prices on the goods purchased. The retailer orders 
freely from the wholesaler with a similar motive. Under 
these conditions the manufacturers' plants are taxed 
to the fullest capacity to meet the demands made upon 
them. Finally, when the output of certain classes of 
goods exceeds the real demands for them, the upward 
movement of prices is stopped, and a scramble among 
dealers begins in order that they may get rid of their 
goods before they begin to decline. This vigorous com- 
petition to dispose of stock leads to a further decline in 
prices, and mercantile houses that have indulged in over- 
trading go to the wall. Under these conditions houses 
that purchase large stocks on credit, with a view to sel- 
ling on wide margins, often find that the profits from 
sales are inadequate to pay the original costs, and that 
failures are certain to result unless emergency funds are 
at hand. It takes but a few failures to react on other 
houses which likewise have over-traded, and finally a 
general ruin of business institutions takes place. 

A condition of rising prices, of general business pros- 
perity, preceded the panic of 1893. During 1892 trade 
was very brisk. But few plants were idle. 

Wholesalers stocked up freely and retailers, f^-^^^seof 

tli6 crisis 
to get the advantage of wide margins, also of i893. 

purchased extensively. Unfortunately, at 

such times traders are not so careful to adapt their supply 

to the demands of trade, and when the reaction sets in 

a great deal of unsalable stock is left to tell its story of 

speculation in the production and in the sale of goods. 

Distributors are more careless in granting credit in pros- 



218 MERCANTILE CREDIT 

perous times than in other times, and when the reaction 
sets in the ruin is more complete. When the reverses 
came in 1893, only the institutions which exercised great 
discrimination in granting credit, and those which 
carefully guarded against over-trading, weathered the 
storm in safety. 

The years of 1898 and 1899, which were noted as the 
period of recovery from the crisis of the preceding years, 
illustrate clearly the phenomena above described. The 
year 1899 stood out conspicuously as one of prosperity. 
It was a year of generally rising prices. Plants were 
running to their fullest capacity, many of them both 
night and day. Demands were brisk in nearly all lines 
and wholesalers and retailers competed vigorously in 
purchasing large stocks of goods to get the advantages 
of the wide margins which are always inevitable at times 
of rising prices. At such times few fail. As a conse- 
quence, in spite of our enormous increase in business 
institutions, fewer failures with smaller losses were re- 
corded in 1899 than in any year since 1881. In the early 
part of 1900 the upward movement of prices was stopped. 
Institutions which had over-traded and had given credit 
carelessly were ruined. There were 1,437 more failures 
in 1900 than in 1899, and the liabihties aggregated 
$47,615,784 more than in 1899. Because of the enlarge- 
ment of operations in building there had been con- 
siderable speculation in building materials, and with a 
decline in price, many dealers in lumber and machinery 
failed. If the price reaction had been more general, the 
failures of 1900 would have been more wide reaching. 



MERCANTILE CREDITS AND DEPRESSIONS 219 

Dun's Review has furnished a summary of the num- 
ber of failures, with the liabilities of the bankrupts for 
each year since 1856. It is difficult to draw 
any conclusions as to the percentage and "°iDer 
amount of failures from decade to decade ©f failures, 
from these figures, as an accurate account 
cannot be taken of the increase in wealth. However, for 
short periods the fluctuations in the number and amount 
of failures are very instructive. The amount of failures 
in 1857 was enormous. For each of the next three years 
the failures amounted to less than one-third those of 
1857. Then in 1861 the failures attained enormous 
proportions. During the remainder of the war and for a 
few years following, the statistics of failures do not 
include the Southern States. In 1873 the failures 
amounted to over $200,000,000. In 1874 there was a 
decline of nearly $50,000,000. Then for the next three 
years there was an increase in failures, the maximum 
being reached in 1878. A reaction with fewer failures 
took place in 1879. Prosperity, as expressed in few 
failures, continued for several years. Since then, as 
before, few failures have occurred during periods of 
rising and many during times of falling prices. 

Commercial failures are inseparably connected with 
credit giving. The frequency and the enormity of 
failures are traceable to the extent and freedom of 
granting credit. The influence of changes in distribu- 
tive industry upon credit and failures remains to be 
considered. When credits are long and transfers are 
frequent, a great number of accounts that represent 



220 MERCANTILE CREDIT 

the same property may be created, and where this is true 
the probabilities of failure are increased. 

During recent years forces have been at work not only 
to lessen the number of distributive factors but to put 

transactions more nearly on a cash basis. 
in orcan- Under the old distributive system, products 
ization of passed through the hands of the grower, the 
mercantile manufacturer, the jobber and the retailer 
^ " before they came into the possession of the 

consumer. Where goods were imported the 
number of distributing factors was greater still. While 
these distributing agents still remain, they are not so 
important as formerly. The department store, the 
mail order house, the branch store, the cooperative pur- 
chasing combines, and institutions which organize the 
means of distribution in connection with manufacturing, 
all lessen the distributing agents and hence lessen the 
extent of credit created for the purpose of disposing of 
goods. In lessening the amount of credit given they make 
failures less likely. One of the reasons for the existence 
of these institutions which organize the distributing 
factors is to put buying more nearly on a cash basis; 
hence less credit is required. The indirect influence of 
these institutions has a remote yet positive effect on 
credit giving. The competitive influence of these insti- 
tutions tends to lower margins realized by distributing 
factors. Retail dealers generally are very much in- 
clined to say that margins are so narrow that they must 
discount their bills if adequate profits are realized. 
Wholesalers are practically forced to take the same 



MERCANTILE CREDITS AND DEPRESSIONS 221 

position. In order to conduct a profitable business it 
becomes necessary for them to have a sufficient capital 
to tide them over from the time goods are purchased 
until they realize on their sales. Hence the tendency 
in the organization of distributive business to drive 
down the margins of the distributing factors is resulting 
in lessening credit. 

Other forces have been at work in the United States, 
which increase the liability to failure and also the 
amount of credit giving. When insolvency 
occurs, merchandise is a quick asset, at ^j^^ 
current value, to the extent that it conforms character 
to the staple type. Articles like cotton, of corn- 
leather, iron, rubber, sugar, coffee, tea, etc., , , 
upon which but little labor has been devoted, 
can be turned into cash much more quickly and with 
less loss than the more highly worked-up manufactured 
products, (which may be classified under the head of 
specialties or novelties). New countries manufacture 
only the cruder kinds of articles. It requires generations 
to develop skill in working up the more highly developed 
textile products, and it has been only recently that 
the United States has been taking an important 
rank in this line of manufacture. The statistics of 
textile manufactures in the United States from 1850 
to the present time show how rapidly this line of 
manufactures has grown. So long as we depended 
on foreign trade for textile products, trade in them 
was more nearly on a cash basis. With a decrease in 
the importation of this class of goods and an increase 



222 MERCANTILE CREDIT 

in production of them at home, trade in them has been 
converted very largely from a cash to a credit basis. 
So long as home production was confined to commodities 
closely approaching the staple type and credit was created 
for the purpose of moving them when a merchant be- 
came insolvent, his assets were quite readily convertible 
at current rates. But when the commodities of a mer- 
chant are largely specialized and are the result of a 
great deal of skill, or are produced to satisfy the demands 
of fashion, then in event of bankruptcy the losses incident 
to the forced sale of such goods are enormous. Hence 
much depends upon the class of goods manufactured at 
home in influencing the frequency and extent of failures. 
Since we have been producing to a large extent the 
more highly worked-up textile products, dating ahead 

has been introduced and it is invariably asso- 
^ ? ciated with the giving of credit. When goods 

are sold dated ahead, the term of credit does 
not begin until after the expiration of the dating. Manu- 
facturers often sell goods before they are produced, and 
jobbers sell them before they have possession of them. 
The payment is considered a cash payment if the goods 
are paid for at the expiration of the time of dating, al- 
though the goods may be delivered at that time or some 
time in advance of the period at which they are dated. 
Dating ahead not only actually prolongs the time of credit 
but it indirectly leads to its extension. As all extensions 
of credit increase failures, the practice of dating ahead 
may be considered one of the causes of failures. There 
is, however, one mitigating circumstance connected with 



MERCANTILE CREDITS AND DEPRESSIONS 223 

the influence of dating ahead on insolvency. The lack 
of adaptation of production to consumption is more 
strikingly seen with specialties than with necessaries. 
In dating ahead the adaptation is shifted from the pro- 
ducer to the retailer, who stands close to the consumer 
and is better acquainted with his wants. Hence dating 
ahead on this account tends to decrease the losses due to 
misapplied production. However, this economy is made 
less effective owing to carelessness in purchasing by re- 
tailers, carelessness that is due to the considerable length 
of time which may be allowed to elapse between the time 
when goods are ordered and when they may be paid for 
under the system of dating ahead. This is due to the 
psychological instinct which makes people more careless 
in purchasing when the time of payment is postponed. 

All these factors must be taken into account in con- 
sidering the influences which operated in the crisis of 1893 
as distinct from the earlier ones in the United States. 
The census statistics for 1890 as compared with those of 
1880 show a wonderful transition during that decade from 
industries devoted mainly to the production of raw prod- 
ucts to those of manufacture. During the decade the 
population increased 25 per cent. The agricultural 
population, however, increased but 10 per cent., whereas 
those engaged in manufacture increased 49 per cent, and 
those in mining 49.3 per cent. The number of acres de- 
voted to wheat production during the decade decreased 
5 per cent., while the corn acreage increased but 15 per 
cent. The statistics of country and city population show 
an increase in the town and city population at the ex- 



224 MERCANTILE CREDIT 

pense of that of the country. The decade was marked by 
a very large increase in the raw materials used in manu- 
facture, whereas the figures on textile production show a 
rate of increase twice as great as the increase in popula- 
tion. The great increase of this class of products was 
marked by falling prices, with the usual evil consequences 
to distributing agents. This increase, the increase in 
credit transactions which accompanies dealings in textile 
goods, and the unsettling of normal business relations 
caused by important changes in industry are more re- 
sponsible for the crisis of 1893 than is usually attributed 
to them. 

It is perhaps safe to say that the work of the national 
and local credit men's associations, the work of credit 
exchange bureaus, the improved efiiciency of mercantile 
agencies, the introduction of system in business and es- 
pecially in credit, and the production on definite orders, 
more than counterbalance the weakness of the credit 
system resulting from a prolongation of credit through 
dating ahead, and also that coming from the influence 
of the production of highly specialized commodities. 
Consequently, business ruin as a result of credit giving 
will be less complete than formerly. 



CHAPTER XIV 

CREDIT MEN'S ASSOCIATION 

I. HISTORY OF THE NATIONAL ASSOCIATION 
OF CREDIT MEN 

The Credit Men^s Association can be traced to a Com- 
mercial Congress held at Chicago at the World's Fair in 
1893. One section of this Congress, which origin of 
was presided over by P. R. Earling of Chicago, National 
was devoted to the subject of credits. The Associa- 
chief paper presented, entitled ''The Value 
of Signed Statements, ^^ was read by Mr. W. H. Preston 
of Sioux City, Iowa, who has since been prominently 
identified with both national and local associations of 
credit men. Only a small number took an interest in the 
association, but a committee was appointed to consider 
the advisability of organizing a national association. On 
account of the crisis which followed, it was thought a very 
inopportune time to organize a National Association of 
Credit Men, and the matter was delayed. Finally in 1896, 
after several local organizations of credit men had been 
formed, arrangements were made for a national associa- 
tion to meet in Toledo, Ohio. 

Opposition to the National Association came from 
three sources: (1) Mercantile agencies feared that it 

225 



226 MERCANTILE CREDIT 

might constitute itself into a reporting agency which 

would displace them, or that it would demand from 

^ . . them better service than they could afford 

Opposition 

to to give. (2) Attorneys feared that it would 

National put them at a disadvantage in regulating 
Associa- fggg^ Q^Q^ (3) Retailers feared that it might 
be oppressive to them. 

The purpose of the National Association was well 
stated in Article II of the Constitution: **The object of 
Purpose of *^^ organization shall be the organization of 
National individual credit men and associations of 
Associa- credit men to make more uniform the basis 
upon which credit rests; to demand a change 
of laws unfavorable to honest debtors and the enact- 
ment of laws beneficial to commerce in the several 
states; to improve methods of diffusing information 
and of gathering data with respect to credits; to im- 
prove business customs; and to provide a fund for the 
protection of members against injustice and fraud." 

The membership was divided into two classes: (1) 

The organized membership, to consist of credit men rep- 

„ ^ resenting individuals, firms, or corporations, 

MemDer- . . , 

ship of "^^o ^^y J^^ through the medmm of local 

National associations; (2) the individual memberships, 
Associa- ^Q consist of credit men representing individ- 
uals, firms or corporations, who may join the 
association directly. The latter are from sections of the 
country where no local association exists. In communi- 
ties where there are local associations affiliated with the 
National Association, the members of the local asso- 



CREDIT MEN'S ASSOCIATION 227 

elation represent it in the National Association. The 
organized membership thus includes the membership 
of all the local associations affiliated with the national 
organization. At the Toledo meeting in 1896 it was esti- 
mated that the volume of trade represented by those 
present amounted to $213,000,000. The growth of the 
association is indicated from the following facts. The 
organized membership in 1900 was 2,511; the indi- 
vidual membership was 490, making a total of 3,001. 
This was an increase of 465 over the membership of the 
previous year. On the first of June, 1904, the organized 
membership was 4,528, and the individual 799, making 
a total of 5,327. ^ On the first of June, 1905, the organized 
membership was 5,085 and the individual 976, making a 
total of 6,060, or an increase of 557 of the organized 
and 177 of the individual membership over that of the 
preceding year. In June, 1906, there were fifty-two 
local associations that were affiliated with branches of 
the national organization. Every section of the country 
is represented. The association meets annually, and the 
work is carried on chiefly by committees. 

The scope of the work is indicated by the names of 
the standing committees : Membership Committee, Legis- 
lative Committee, Business Literature Com- 
mittee, Committee on Improvement of Mer- ?^" 
eantile Agency Service, Committee on Credit 
Department Methods, Committee on Credit Coopera- 
tion, Committee on Adjustment Bureaus, Committee 

* Monthly Bulletin of the National Association of Credit Men, 
July, 1905, p. 24. 



228 MERCANTILE CREDIT 

on Investigation and Prosecution, Committee on Fire 
Insurance, Committee on Bankruptcy Law, Committee 
on Banking and Currency, Committee on Uniform 
Exemption Laws, Committee on Uniformity of State 
Laws, on Federal Incorporation Laws, and on Commer- 
cial Arbitration. 

From the outset the National Association and the 

local associations undertook the same kind of work. To 

interchange information in regard to credit, 

Differen- ^^ make credit men more intelligent, and to 
tiation of . , . , . . , . \ -,. 

work of improve legislation m the interest of credit 

national men, were the early ob j ects sought. Gradually 
and local plans were devised to place the organization 
tions ^^ ^ broader basis, and new standing commit- 

tees were organized. Some of the local asso- 
ciations saw that their effectiveness would be increased 
and enthusiasm for them promoted by their undertaking 
practical work, such as the organization of adjustment 
bureaus and bureaus for the exchange of credit informa- 
tion. The National Association has come to see that 
it must be organized on a broader plan, and that as a 
recent president of its organization has said, ^*It must 
stand for the general improvement of credit conditions, 
act as a cement force between its various local organiza- 
tions devoted to the ethical phases of credit, and act as 
an educational center of economic problems."^ Although 
its work and that of the local associations^ overlap some- 
what at present, the tendency is for each local association 

^ F. W. Standart: Monthly Bulletin of the National Association 
of Credit Men, January, 1905, p. 7. 



CREDIT MEN'S ASSOCIATION 229 

to undertake the decidedly practical work and to con- 
sider the problems of credit peculiar to its locality. The 
National Association is limiting itself more and more to 
the general problems of credit. It aims to supplement 
and to coordinate the work of the local associations and 
to cooperate with them on general problems such as those 
of legislation. There is still a Committee of the National 
Association on Investigations and Prosecution, but its 
experience seems to demonstrate that this sort of work 
can be better conducted by local associations where they 
exist. Here, as elsewhere, the National Association finds 
its chief efficiency in securing the cooperation of the 
various local bureaus rather than in undertaking this 
sort of work itself. 

The most effective committees have been the following: 
Committee on Improvement of Mercantile Agency 
Service, Committee on Credit Department Methods, 
and the Legislative Committee. 

From the outset the credit men manifested a desire to 

cooperate with the agencies in inducing merchants to 

make better reports. From the beginning, 

the National Association considered as one of ^^^^ ^' 

Com- 
the chief topics the inadequacy of the agency mittee on 

reports, with the result that at some of the Mercan- 
earlier meetings, representatives of the Dun *^^® 
and Bradstreet agencies were present to de- service 
fend their methods. It was urged that signed 
statements should be secured from the merchant in all in- 
stances when possible, and that if the latter refused and 
the information had to be secured otherwise, this fact 



230 MERCANTILE CREDIT 

should be indicated in the report of the agency. It 
was asserted that agencies ought to have efficient repor- 
torial staffs who were experts in dealing with business 
men and in reporting business conditions; that a search 
of records ought to be made in every instance, and that 
no indefinite reports should be given; that all ratings 
should be revised at least every six months; and that 
new information should be furnished promptly on re- 
quest; that all statements should be carefully tabulated. 
It was urged that a large number of the reports were 
written by men in various communities, usually by law- 
yers, who relied largely on hearsay evidence, and that the 
reports in no way indicated the sources of information. 
It was mantained that reports, especially in country dis- 
tricts, were inaccurate and that special reports were re- 
ceived tardily. In all cases where a regular reportorial 
staff was collecting information, it was said to consist of 
an inferior set of men; and it was believed that much of 
the antipathy of business men for the agencies and the 
inadequacy of information was due to a lack of tact and 
diplomacy on the part of the reporters of the agencies. 

The agencies looked upon the claims of the credit men 
as ideal and visionary. The latter were informed that 
the carrying out of the recommendations here suggested 
would involve a very great expense, and that the receipts 
of the agencies would not warrant the undertaking of 
the improvements suggested. 

The agitation in favor of a higher standard had an 
immediate effect in improving the efficiency of the agen- 
cies. The President of the Bradstreet agency claimed 



CREDIT MEN'S ASSOCIATION 231 

that in 1898 his company expended $150,000 more than 
in former years in improving the service and it was said 
that extra expenses were incurred by the Dun agency 
for the same purpose. According to these agencies 
their reports were secured by a more efficient set 
of men, were better arranged and more promptly 
rendered. 

The Mercantile Agency Committee has compiled 
statistics on the comparative efficiency of the Dun and 
Bradstreet companies, covering in general the following 
points: (1) Average time between asking for reports 
and receiving them; (2) average age of the first report 
received; (3) percentage of reports containing signed 
statements not more than one year old; (4) the prompt- 
ness of reporting changes; (5) arrangement and form; 
(6) classification of reports according to excellency by 
districts. These data were furnished by the local 
associations and the members of the National Associa- 
tion. When these facts were first published they at once 
showed the comparative efficiency of the leading agencies 
and at once a vigorous rivalry was created. So long as 
no method exists to show definitely the comparative 
merits of rivals, vigorous competition will be lacking; 
whereas the fixing of a definite standard for determining 
superiority stimulates efforts to excel as nothing else can. 

The credit men claim that the suggestions made to the 
mercantile agencies have received consideration and that 
the service of the agencies has improved in every way. 
The feature complained of most frequently at present 
is the lack of accuracy in the detailed reports. One of 



232 MERCANTILE CREDIT 

the resolutions presented at the 1905 meeting and passed 
unanimously, was ''That R. G. Dun & Co. and the 
Bradstreet Co. be requested to discontinue in their 
reports the expression, 'He is the reported owner of real 
estate,' etc. The ownership of real property is a matter 
not of supposition but of fact, and therefore easily deter- 
mined; and we have a right to expect that they will search 
the county records and establish the facts as to whether 
the real estate referred to stands on record in the name 
of the reputed owner or some one else.'' This resolution 
indicates the feeling of the credit men regarding certain 
classes of the reports of mercantile agencies. 

The Mercantile Agency Committee has endeavored to 
secure signed statements from merchants upon uniform 
blank sheets made out by the committee. To this end 
it has endeavored to prevail upon the agencies to use 
its signed statements, but so far its efforts have been 
unsuccessful. Although the agencies have modified the 
form of the blanks formerly used, they have been unwill- 
ing to adopt those suggested by the credit men. As 
stated above the signed statement has many features to 
commend it. Although statements rendered in writing 
may be inaccurate, they are as a rule, much more truthful 
than verbal reports. The necessity of making a signed 
statement leads merchants to know their business more 
accurately and to keep better books. A signed state- 
ment has a legal significance. The merchant who makes 
a signed statement does so with a view to secure credit. 
If his statement is manifestly false, his offense comes 
under the head of securing goods under false pretenses, 



CREDIT MEN'S ASSOCIATION 233 

and the offender is criminally liable. So in all cases 
where preferences are allowed and the bankrupt has 
made some signed statements, the advice of his attorney 
is, invariably, that he shall take care of such creditors 
first. 

It is well known that different localities have different 
classes of agency service. Everything depends on the 
efficiency of the man having charge of the territory. In 
some places the service of one agency is far superior to that 
of the other, and in other localities there verse is true. 
A resolution providing for the continuance of the investi- 
gation of the relative merits of the two agencies, and 
also for an investigation of localities where each is 
deficient, was passed at the June meeting, 1905. Form X 
shows the method of investigation by the committee. 

Like other private concerns the agencies are of course 
interested in profits, and this is kept in mind in the intro- 
duction of improvements in service. That the service 
rendered is not all that is desired by business houses is 
seen in the tendency of large wholesale and banking 
houses to employ experts whose exclusive duty it is to 
investigate customers affairs and to study conditions 
which directly influence credits. In doing this they are 
limiting their agency service and are depending more and 
more on their own agents. In this development we see a 
tendency to return to conditions which existed prior to 
the organization of the agency service. How far this 
tendency will go remains to be seen. 

The Committee on Credit Department Methods has la- 
bored from the outset to secure the adoption of uniform in- 



234 MERCANTILE CREDIT 

quiry blanks and statement blanks. At the first meet- 
ing, forms were proposed and sent out to the various local 
associations to be topics for discussion at the 

Work of meetings in 1897. Forms were adopted at 

Coin- 

mittee on *^^ convention of 1898 which provided for 

Credit giving the creditor a clear idea of the standing 

Depart- ^f debtors and were sufficiently binding as to 
Methods, ^^^e the debtor criminally liable in case of 
false statement. Much is gained in the adop- 
tion of a single form or report. Merchants are not con- 
fused by having different kinds of reports to make out; 
they know what to expect, and the binding nature of 
the report becomes generally known. 

At present the Committee on Credit Department 
Methods manufactures several forms of property state- 
ment blanks, several short payment forms, a trade in- 
quiry blank, and unjust discount stickers. These are 
sold to members and others. The unjust discount sticker 
may be pasted on a letter. It contains this statement: 
''Discount for cash is a premium for prompt payment 
within the time and upon the terms as agreed, and when 
not earned should not be claimed. Please add to your 
next remittance $ "^ 

It soon became apparent that in order to have uniform- 
ity in bankruptcy legislation, it was necessary to secure 
the passage of a national law instead of trying to bring 
about uniformity through the cooperation of the various 
state legislatures. No matter what the skill with which 

^ Monthly Bulletin of the National Association of Credit Men, 
June, 1905 pp. 35, 36. 





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CREDIT MEN'S ASSOCIATION 235 

state laws were drafted, state legislatures could always 

be relied upon to modify the laws sufficiently to make 

the legislation of the various states diverse. 

On this account the National Association of Associa- 

Credit Men, as well as most of the local asso- instnx- 

ciations, vigorously supported the original mental in 

Torry bill when it was before Congress, and causing 

later the law which was passed in 1898. The /\ t^^^ 

Legislative committee has been very aggres- passed. 

sive in proposing changes in the law, and the 

amendments which have been passed were chiefly due to 

the work of this committee. During this time, however, 

the interest of the legislative committee in procuring 

reforms in state legislation has never ceased. 

The National Committee usually works in cooperation 

with the state associations to secure local legislation. In 

all instances where bad laws are on the statute 

books, cases are introduced to test their Coopera- 

constitutionality. In 1896 the New Orleans ^^"^ ^^ , 

national 
Association, with the consent of the National ^nd local 

Association, took charge of all legislative associa- 

questions in Alabama, Arkansas, Texas, ^°^f "* 

havincT 
Georgia, the Carolinas, Mississippi, Florida, state laws 

and Louisiana. Two laws were passed by the passed. 
Louisiana Legislature in 1896. The laws intro- 
duced in Alabama and Arkansas were passed in 1899. 
The chief reforms in state legislation prevented the sale 
of goods in bulk, and prevented preferences. 

When the Lodge Bill concerning the consular service 
was before Congress, the Legislative Committee of theNa- 



236 MERCANTILE CREDIT 

tional Association labored in its interest. The association 

at its June meeting passed a resolution favoring the adop- 

, , ^ tion of this law or another containing some of its 
Worked . . _, 

fQj provisions. The prominent provisions advo- 

consular cated were an improved classification and 

service grading, the substitution of salaries for fees, an 

increase of salaries, the application of the merit 

system, efficiency as a test for continuance in office, the 

Americanization of the service, and the requirement that 

consuls must be familiar with either the French, German, 

Spanish or Chinese languages, and "possess a knowledge 

of the natural, industrial, and commercial resources of 

the United States." 

The variations in the provisions of the homestead and 
exemption laws of the various states have caused an 
Work for endless amount of confusion and annoyance to 
uniform commercial interests. The National Associa- 
state laws. ^Jq^ ^^ j^g meeting in 1905 resolved to engage in 
a campaign of education to make possible more uniform 
laws. It was recommended that the local associations 
make this subject a feature of special interest in the follow- 
ing year. The National Association, through the Legisla- 
tive committee, began an investigation of these laws with 
a view to printing them to show their lack of uniformity. 

Other matters which engaged the attention of the 
Legislative Committee were (1) the making criminal the 
Other naailing of a fraudulent statement concerning 

laws to one's financial condition with intent to de- 
prevent fraud by securing through it goods or money, 
and (2) the enactment of laws designed 



CREDIT MEN'S ASSOCIATION 237 

to regulate the carrying on of business under an assumed 

or fictitious name. 

Nearly all the laws of recent years providing for better 

relations between creditors and debtors may be traced 

to credit men's associations. In a number , „ 

. . Influence 

of notable mstances these organizations have ^f credit 

failed to accomplish their objects. How- Men's As- 
ever, their power is growing. Statements sociation 
made by Ex-president Fessenden of the New 
York Credit Men's Association, in an address before 
that organization in 1899, are very significant for that 
date. ** To-day we are recognized," said he, "in the 
city and in the state, through the legislature, as a 
factor to be consulted in all proposed laws affecting 
merchandise credits. With all due modesty, yet 
with full confidence in what I declare, I say to you 
that we have it in our power to-day to dictate 
what bills introduced into state legislatures shall or 
shall not become laws, in so far as they affect us credit 
men." 

The Committee on Investigation went by that name 
until the annual convention of 1898 when it was changed 
to the Committee on Investigation and Pros- change of 
ecution. Nearly all the local associations Investiga- 
have similar committees and as a rule they ^ion Corn- 
work in cooperation with the national com- °" 
mittee. Cases of insolvency are investigated and when 
evidence exists to show that there has been a fraudulent 
conversion of assets, the evidence is placed with a prose- 
cuting attorney and the merchant is prosecuted. The 



238 MERCANTILE CREDIT 

purpose of the committee is not to make collections but 

to prosecute the guilty. 

At the meeting of 1898 a series of resolutions was 

passed which provided for the employment of attorneys 

to investigate and prosecute frauds. Pro- 

Prosecu- vision was also made for urging the local 
tion of . . IT*, 

fraud. associations to report to the Investigation 

Committee of the National Association all 
eases of failure, whether fraudulent or not. It was 
made the duty of this committee to investigate the 
debtor's commercial record, present affairs, capacity and 
character in order to make recommendations to the in- 
volved creditors as to a reasonable compromise if the 
debtor was honest, and as to the extension of such aid as 
would enable the debtor to continue in business. 

In 1899 after the national bankruptcy law was passed, 
a plan was submitted by the national secretary to the 
local associations for discussion at their meetings. The 
plan provided for the submission of all offers for the 
compromise of indebtedness to the Investigation Com- 
mittee of the State and National Associations, and cred- 
itors were pledged to refuse offers of compromise until the 
investigation by the constituted authorities should take 
place. The spirit if not the letter of this plan was later 
carried out. A fund was voted to be used in the investi- 
gation and prosecution of fraud, and individual credit- 
ors were pledged not to accept compromise offers of 
settlement. 

The difficulties involved in carrying on the work of 
investigation and prosecution by the National Associa- 



CREDIT MEN^S ASSOCIATION 239 

tion were seen to be almost insurmountable and the 
Board of Directors of the National Association at their 
meeting in 1903 decided to abandon opera- 
tions under the investigation and prosecu- Persecu- 
tion fund as far as new cases were concerned. Bureau. 
The following year, however, the National 
Association, instructed the directors to reorganize the 
Investigation and Prosecution Bureau as an adjunct to 
the national work, and recommended "that a trust fund 
of $50,000 be raised with which to equip and maintain 
the bureau."^ 

The Secretary-Treasurer immediately sent out com- 
munications to the local associations to obtain opinions 
on the proposed plan with reference to the collection of 
the fund. The plan suggested did not meet with ap- 
proval of the local associations, and the board of directors 
at its next meeting decided to abandon the project. 
They recommended that the work be taken up by the 
local associations in their respective districts, and that 
the costs of investigation and prosecution be borne by 
the association or associations interested. This seems to 
have been the best way of disposing of the matter, since 
the local associations can organize much more effectively 
to investigate and prosecute cases in their own district 
than a committee or bureau of the National Association 
can handle the cases arising in all parts of the country — 
often, indeed, in those parts with which they are but 
slightly familiar. 

^ Resolution of National Association, 1904. Bulletin, June 
19, 1905. 



240 MERCANTILE CREDIT 

The Committee on Credit Cooperation was organized in 
1904. It was not thought advisable to establish a credit 
Credit Co- exchange bureau, but it was considered desir- 
operation able that there be a greater interchange of 
Com- ledger experience among members of the As- 

^^ ^^' sociation. The committee appointed limited 
itself to advocating a large degree of interchange of in- 
formation, and this committee was retained for 1905. 
Many local associations and many trades have credit 
exchange bureaus. 

The Committee on Fire Insurance that was recently 
installed, at first used its influence to induce debtors who 
Com- ^^^ ^^ insufficient amount of fire insurance to 

mittee on insure themselves adequately. Since then it 
Fire In- j^^s prevailed on many of the local associations 
to appoint standing committees on fire insur- 
ance. At the National Convention of Credit Men held 
in Minneapolis in June, 1911, the Fire Insurance Com- 
mittee submitted the following resolutions, which show 
clearly the position of this committee with reference to 
fire insurance. 

"Resolved, That the National Association of Credit 
Men in convention assembled, recognizing that the 
present conditions of fire insurance and fire waste are 
imposing an unwarranted and unnecessary burden 
upon our people, makes an earnest appeal to its 
members and particularly its affiliated branches to 
double and redouble their efforts to secure relief from 
these conditions. 

* First, by using every means at hand, and especially the 



CREDIT MEN'S ASSOCIATION 241 

literature of our association, to give the public in general 
a thorough understanding of the problems. 

"Second, by making a conscientious study of local 
hazards especially as cited in the reports on cities and 
towns as issued by the engineers of the National Board 
of Fire Underwriters, and, acting upon them, demanding 
of the municipal authorities that such hazards be reduced 
or eliminated. 

"Third, by endeavoring to secure in every state the 
enactment of a fire marshal measure modeled as closely 
as possible upon the bill as introduced, largely through 
the instance of this association, in the Legislature of the 
State of New York. 

"Fourth, by keeping in touch with the state depart- 
ments formed under the fire marshal laws with a view to 
securing from them the highest possible efficiency. 

"Fifth, by cooperating with other organizations, such 
as state fire protection associations formed to reduce the 
losses of their respective states." 

II. LOCAL ASSOCIATIONS OF CREDIT MEN 

When the National Association of Credit Men was 
formed in 1896, there were thirteen local associations 
of credit men.^ In July, 1912, there were ninety-one 
local credit men's associations affiliated with the National 
Association and thirty-seven states were represented. 

* These were located in the following cities: New York, Detroit, 
Cincinnati, Sioux City (Iowa), Portland (Oregon), St. Joseph 
(Missouri), St. Louis, Kansas City, Memphis, New Orleans, 
Louisville, Nashville, St. Paul and Minneapolis. 



242 MERCANTILE CREDIT 

The purposes of the early associations were (1) to 
reform the legislation of the states regarding bankruptcy, 
(2) to prevent creditors from being defrauded, (3) to 
make more uniform the conditions under which credit is 
given, (4) to increase and diffuse knowledge in regard to 
credit, and (5) to make unity of action possible where 
the interests of credit men were involved. The progres- 
sive work of the associations was done by the committees. 
The legislative committees were especially active. 
Laws in the various states were introduced at their sug- 
gestion, and through cooperation with the National Asso- 
ciation of Credit Men, a campaign was begun which has 
tended to make the laws of the various states more 
uniform. 

Most of the local associations hold several meetings 
each year, some as often as once a month. The topics 
for discussion at these meetings cover a wide range. They 
are usually those of immediate interest to credit men, such 
as The Bulk Sales Law, Corporation Reports, Credit 
System in Commercialism, The Adjustment Bureau, 
Credits, Credit Exchange, Law for the Credit Man, The 
Bankruptcy Act, Mercantile Agency Service, Collec- 
tions, Idealism in Business, Systems and Methods of 
handling Accounts and Collections, Fraudulent Cases, 
The Bankruptcy Law and its Repeal, etc. 

Soon after some of the local credit men^s associations 
were formed, plans were adopted for exchanging credit 
information. With some of the associations the credit 
clearing house work became a prominent feature. Some 
have organized both a credit exchange bureau and an 



CREDIT MEN'S ASSOCIATION 243 

adjustment bureau. In other cases the Adjustment 
Bureau work has been introduced without a Credit 
Exchange Bureau. When the Clearing House Bureau 
was organized as a part of the work of the association, 
the exchange of credit information became an adopted 
policy. 



PART II 

LEGISLATION 



CHAPTER XV 
BANKRUPTCY LEGISLATION 

The right to contract and the enforcement of contracts 
are almost as old as the race. In primitive societies public 
opinion and custom compelled the enforce- contracts 
ment of contracts. They cover a variety of of primi- 
things, but usually are concerned with com- ti^® 
mercial agreements. The trade relations of ^^^^ ®' 
people were the earliest relations between families and 
states. Barter was, of course, the earliest form of the 
trade relation. When the buyer did not have goods to 
exchange for the commodities of the seller, he gave wam- 
pum, beads, or some of the many other instruments used 
by primitive people, which could be exchanged by the 
seller for goods needed. These were the earliest and 
crudest forms of money. When the medium of exchange 
did not exist or was not in possession of the buyer, he 
agreed to deliver goods or services to the seller as a com- 
pensation for the commodities received. This was the 
earliest kind of contract. It had the sanction of the 
public opinion of the group and was enforced by that 
sanction. 

When political organization became more definite, 
states prescribed by formal laws what the people 
should do and should not do, which was deemed 
imperative to the welfare of the states. In this 

247 



248 MERCANTILE CREDIT 

development of state activity laws governing trade 
relations were everywhere passed. These laws always 

favored the creditor. He had parted with 
legisla- something valuable and took chances on a 
tionwith loss Until the state gave him some redress, 
reference r^^ protect the creditor the early laws 

were of a drastic character. At that time 
the right of action againt the debtor's property was 
of less significance to the creditor than it is now. 
He frequently had but little property, and the sur- 
render of the person of the debtor either for his im- 
prisonment or for the taking of his life was considered 
necessary to protect the interests of the creditor. All 
the early bankrupt laws provided either imprisonment 
for the debtor or the death penalty. Until the nineteenth 
century the death penalty for those who failed to pay 
their debts was very common. 

In conformity with the changes in industrial organiza- 
tion in modern times, and especially in the nine- 
teenth century, the relations between debtors and credi- 
M d m ^^^^' ^^^ ^^^^ contract relations, have changed, 
views with The spirit of commercial interdependence 
reference has given rise to the idea that the granter 

to the re- ^£ credit is in a measure a partner of the 

lations 

between debtor. In the big undertakings of the 

debtors present day, business cannot be carried on 
^^ without borrowed capital. To carry on 

enterprises and to develop resources, under- 
takers must borrow money. In lending, the creditor 
makes an investment and takes chances on the outcome. 



BANKRUPTCY LEGISLATION 249 

He inquires into the character, earning ability, etc., of 
the borrower and makes his investment based upon his 
investigations. The borrower invests the capital pro- 
cured in an enterprise more or less hazardous, with the 
hope of realizing returns which are roughly in proportion 
to the risks of the undertaking. In new countries 
investments involving great risks are made much more 
frequently than in older countries, and interest rates are 
consequently higher since they cover risks. Great busi- 
ness risks are necessary to the rapid development of a new 
country, and often the rapidity of the development is pro- 
portional to the degree of risk. Although many succeed, 
a great many fail, and those who succeed render impor- 
tant social services. Where this situation prevails, the 
honest investor who has been unfortunate cannot be 
looked upon as a criminal. The creditor who considers 
the nature of his investment and who accepts a high rate 
of interest because the risk is hazardous, has no special 
claim in equity against the debtor who deals honestly 
with him aside from the surrender for the creditor's bene- 
fit of the property of the debtor. In accordance with 
this conception of business ethics, which became pro- 
nounced in the early half of the last century, laws were 
passed in England and America dealing leniently with 
honest debtors. These laws first prohibited the death 
penalty and imprisonment. Then they held the bank- 
rupt responsible in debt payment for only the amount 
of property which he possessed at the time of his failure. 
Any other legal position than this would not have been 



250 MERCANTILE CREDIT 

in keeping with the commercial development above 
described. 

Every modern state regulates by bankruptcy or insol- 
vency laws the relations between creditors and their 
debtors who fail to pay their debts. Ordi- 
Modern narily an insolvent is one who cannot pay his 
regulate debts or one whose liabilities exceed his assets.^ 
relations Insolvency is necessary to bankruptcy pro- 
between ceedings. In some countries, France, Austria, 

. and Germany, a stoppage of payments results 

creditors, necessarily in bankruptcy proceedings. In 
England, Denmark, Norway, and the United 
States, "Acts of bankruptcy '^ are necessary to bring 
about an adjustment of bankruptcy; while in other 
countries the courts must determine what conditions of 
the cessation of the payment of debts will result in bank- 
ruptcy proceedings.^ In Belgium, Italy, and Spain the 
payment of debts may be suspended under certain 
circumstances without the debtors going into bank- 
ruptcy. In Italy the consent of a majority of the 
creditors is necessary for a suspension of payments. 
In both Belgium and Spain debtors are allowed to 
establish with creditors compositions which forestall 
bankruptcy. 

In all the southern countries of Europe except Spain, 
bankrupt laws are applicable only to traders, whereas in 
the northern countries of Europe and in the United 
States all classes of debtors are subject to the bankruptcy 

^ See Lenthold : Russiche Rechtskunde, Leipzig, 1879. 
2 Dunscombe: Bankruptcy. 



BANKRUPTCY LEGISLATION 251 

laws. It was not until 1881 that Spain established a 
bankruptcy law for traders as well as non-traders. 
As early bankruptcy laws were drastic in 

013.SS6S to 

character, the privilege of bankruptcy was a ^j^j^jj 
doubtful one. But since bankruptcy has bank- 
come to mean a cancellation of debts if the ruptcy 
bankrupt has not been dishonest and if he , 
surrenders his property, the trader enjoys 
advantages over other classes in countries where bank- 
ruptcy is denied to nontraders, since there the latter 
class must pay all their debts in full. 

In all countries distinctions are made with reference 
to causes of insolvency based upon the culpability of the 
debtor who goes into bankruptcy. In some j^_ 
countries notably France, Belgium, Italy, and solvency, 
Switzerland, a distinction is made between simple 
insolvency, simple bankruptcy, and fraudu- j^^*.^^ 
lent bankruptcy. A failure without any fraudu- 
fraudulent circumstances attending it, is an lent bank- 
insolvency. Degree of guilt is recognized as ^"^ ^^' 
a distinction between simple bankruptcy and fraudulent 
bankruptcy, for each of which offences a prison sentence 
is prescribed. Such offences as excessive personal ex- 
penses, speculating in stocks, giving preferences to 
creditors, failing to keep proper books, etc., are recog- 
nized as causes of simple bankruptcy. In many other 
countries in which the above terms are not used, we 
find similar distinctions in which the treatment of the 
debtor depends upon whether or not he was guilty of 
misconduct. 



252 MERCANTILE CREDIT 

There are three ways in which bankruptcy proceedings 
may be initiated: (1) by declaration of the debtor him- 
- . . ^ self; (2) by the petition of one or more cred- 
of bank- itors; and (3) by action of the court which 
niptcy has jurisdiction. In some countries bankrupts ^ 

P^°" are given the privilege of applying for a judg- 

ment of bankruptcy. In others, as soon 
as the debtor is unable to pay his debts, it is made his 
duty to make known the condition of his affairs. The 
petition of the debtor is an act of bankruptcy both in 
England and the United States. In many countries^ 
any creditor regardless of the amount of his claim, may 
place a debtor in bankruptcy by petition. 

In most countries in former times as soon as bankruptcy 

proceedings were instituted the bankrupt could be put 

in prison. Recently the rigor of these laws 

Treatment j^^g ^^^^j^ lessened and imprisonment is re- 

01 debtor 

during sorted to only in exceptional cases. In all 

bank- instances the declaration of bankruptcy de- 

ruptcy prives the debtor of the possession and control 

ceedings. ^^ ^^^ property, until his relations with his 

creditors have been adjusted. Since the period 

of becoming insolvent is a gradual one, the time at which 

the debtor^s control of his property must cease is in 

nearly all countries extended back beyond the time of the 

declaration of bankruptcy. The laws and practices of 

countries vary greatly on this point. 

In the adjudication of bankruptcy a court of compe- 
tent jurisdiction has charge of affairs. In the various 

* France, Spain, Italy, Belgium, Germany, Austria and Hungary. 



BANKRUPTCY LEGISLATION 253 

countries this court appoints trustees, administrators, 
etc., to take control of affairs, to investigate the con- 
duct of the bankrupt, to take charge of the B^nk- 
estate, and to insure to each creditor his valid ruptcy 
claims. Everywhere an assembly of creditors P^^" 
is given privileges and rights which vary with ^®® "^^^* 
the laws of the country. But whatever the system in 
vogue, the property of the debtor is administered and 
distributed among the creditors under the supervision of 
the court that has charge of the bankruptcy proceed- 
ings. In the closing up of the bankrupt's affairs, certain 
precautionary measures are everywhere employed. An 
inventory giving a full description of the bankrupt's 
property and an estimate of its value, is taken. All 
creditors must prove claims against the estate. To 
guard against the misappropriation of funds, the admin- 
istrators are held responsible for misconduct and negli- 
gence; in many cases they are required to give bond, and 
in some cases the funds received must be kept in a public 
treasury. 

In many countries the ordinary course of bankruptcy 
procedure may be avoided by arrangements between the 
debtor and creditor, known as compositions, by which 
they themselves agree to terms of settlement. By the 
composition the debtor retains or is restored to the man- 
agement of his business and is often discharged from a 
portion of his liabilities when he carries out certain stipu- 
lations. An extension of time to meet his obligations is 
sometimes granted the debtor. As it is impossible to 
secure unanimity of action among creditors, in most 



254 MERCANTILE CREDIT 

countries a majority of them is given power to bind the 

minority in making compositions. However, a double 

majority is required, that is, numerically and in assets 

varying from a simple majority in number and three-fifths 

in value as in Spain, to a two-thirds majority in number 

and four-fifths in value as in Hungary. The approval of 

the proper judicial authority is required in all countries. 

The method of discharge is different in England from 

that of the Continent. On the Continent the court must 

either approve or reject the composition agreed 

he dis- upon by creditors. It has no right to modify 
charge of . . , . ., 

debtor. ^^j ^^^ ^^^ ^^ grant a debtor the privilege of a 

composition on his own motion. In England 
on the other hand the court may discharge a debtor from 
his debts after he has paid a portion of them. In Eng- 
land Legislation of this sort more lenient to debtors 
began in the reign of Queen Anne and culminated in the 
Acts of 1883 and 1890. 

Within the last fifty years what is known as Preventive 
Compositions have been adopted by several European 
Pj.g_ countries and the United States. They are 

ventive arrangements entered into between creditors 
com- and debtors by which the latter avoids going 

posi ons. ■j;jjj.Qugjj bankruptcy proceedings. They are 
intended primarily for the benefit of insolvent debtors, 
but are beneficial to creditors also. When the debtor 
makes a request for the privilege of entering into a com- 
position with his creditors, he is usually required to 
report to the court the names of his creditors, their 
residences, the amounts owed each, a statement of his 



BANKRUPTCY LEGISLATION 255 

assets, and a proposition for composition. While nego- 
tiations are pending, the debtor cannot transfer any por- 
tion of his property, or do anything which will affect the 
condition of his estate. During this period all suits and 
executions against the debtor are suspended. The compo- 
sition must be agreed to by a majority of the creditors, 
the action of which is usually binding on all the rest. 

The first English law providing for a preventive com- 
position, passed in 1869, placed the control of the compo- 
sition almost exclusively in the hands of the creditors 
and debtor, with only a nominal control by public 
authority. The clerk of the court was required to register 
the composition, but in doing this his power was restricted 
to his seeing that necessary formalities had been complied 
with. This Act was exceptional in legislation of this 
class, for the negotiations were free from judicial control 
and the agreements entered into did not require the con- 
firmation of a court. 

The laws of 1883 and 1890 reversed the policy of the 
law of 1869 by giving the court supervision over the 
negotiations between creditors and debtor, by making 
the confirmation of the court necessary to the validity 
of agreements between them, and by giving the court the 
power of veto; that is, of refusing to approve a composi- 
tion when it seemed that the interests of all classes war- 
ranted such action. In all the Continental countries, 
the proper court exercises supervision over composi- 
tions, and the confirmation of a composition is necessary 
to the validity of an agreement. 

In most countries certain civil, commercial, and polit- 



256 MERCANTILE CREDIT 

ical rights are lost to debtors through bankruptcy pro- 
ceedings. European countries may be classified in three 
m X X groups with reference to the severity of bank- 
of bank- ^^P* laws: (1) In France, Belgium, Spain, 
rupts in Italy, and the Netherlands the debtor must 
different p^y ^jj j^jg debts in full before he can be 
restored to full civil rights; (2) in Germany 
and Austria, as a rule, the debtor is restored to all 
his rights upon the conclusion of bankruptcy proceed- 
ings; (3) in England the debtor is restored to all his 
rights when he is discharged by the court and a certif- 
icate is given him to the effect that his insolvency was 
due to misfortune. He is also freed from all disabilities 
when the bankruptcy is annulled after it has been 
established that his debts have been paid in full. 

In the first two of the above groups there are many 
exceptions. In Spain and Italy a debtor is restored to 
his rights when a composition has been granted and all 
its conditions have been fulfilled. In the Netherlands 
a debtor is treated similarly if he has acted throughout 
in good faith. In France and Belgium before the debtor 
can be restored to his rights he is required to pay all his 
debts, even those from which he has been excused by the 
terms of the composition. In Spain after those who have 
obtained a composition have complied with its condi- 
tions they may be given all their rights; whereas all 
other bankrupts must pay their debts in full to obtain the 
same privileges. As a rule, fraudulent conduct prevents 
the restoration of rights to a bankrupt, and in some coun- 
tries the fraudulent are punished with penal servitude. 



CHAPTER XVI 

THE BANKRUPT LAW OF 1800 

Although the Constitution of the United States has 

been in force 123 years, in but thirty-one years have we 

had national bankrupt laws. In this respect 

our experience has been different from that f*^*J°^^* 

bankrupt 
of most foreign countries. England has had i^ws. 

a bankruptcy law since the reign of Henry 
VIII, her last Act having been passed in 1890. Prac- 
tically all other European countries have bankruptcy 
systems. It must not be inferred, however, from our 
experience with national bankrupt laws, that the United 
States is opposed to bankruptcy legislation. Many of 
the states have insolvency or some form of bankruptcy 
laws, and the opponents of national bankruptcy legisla- 
tion in Congress have usually contended that this class 
of legislation should be left with the various states. 

Authority for a national bankrupt law was given by the 
following clause of the Eighth Section of Article I of the 
Constitution: Congress "shall have power to Right to 
establish a uniform rule of naturalization and legislate 
uniform laws on the subject of bankruptcy °^ oank- 
throughout the United States." The changed giyg,! ^he 
attitude in favor of leniency to debtors is seen national 
in the discussion in the Constitutional Con- govem- 
vention; when this clause came up, ''Mr. ^j^^ ^^^^^ 
Sherman observed that bankruptcies were in stitution. 

257 



258 MERCANTILE CREDIT 

some cases punishable with death by the laws of 
England; and he did not choose to grant a power by 
which that might be done here/^^ In reply Mr. Gou- 
verneur Morris said "that this was an extensive and 
delicate subject. He would agree to it because he saw 
no danger of abuse of the power by the legislature of 
the United States."^ Connecticut was the only state 
that voted in the negative on this clause. 

That the interests of the creditor class were uppermost 
at the time, however, may be inferred from the following 
clause of the forty-second number of the Federalist 
written by Madison; viz, "The power of establishing 
uniform laws of bankruptcy is so intimately connected 
with the regulation of commerce, and will prevent so 
many frauds where the parties or their property lie, or 
be removed into different states, that the expediency of 
it seems not likely to be drawn in question.^' No men- 
tion is made of the rights of debtors. 

The issue to define the scope of Congress in legislation 
on bankruptcy was first drawn between the strict and 
Scooe of loose constructionists of the Constitution, the 
legislation former claiming that the powers of Congress 
0^ were restricted to those specially granted in 

ongres . ^j^^ Constitution. When the Constitution 
was adopted, the bankruptcy legislation of other coun- 
tries was limited to traders. The strict constructionists 

^ Journal of the Constitutional Convention, pp. 650-665. 
Madison. 

2 Journal of the Constitutional Convention, pp. 650-665. 
Madison. 



THE BANKRUPT LAW OF 1800 259 

consequently claimed that the clause of the Constitution 
giving Congress the right to pass bankruptcy laws limited 
the power of Congress in legislation to traders. The 
Supreme Court has since settled this dispute in conform- 
ity with loose constructionist theory in holding that the 
Constitution granted to the national government the 
right to legislate in bankruptcy not only for traders but 
for all classes of business men. 

The depredations made on our commerce by Great 
Britain and France prior to 1800 disorganized our trade, 
and both debtor and creditor classes believed ^^^ ^^ 
that it would be to their mutual interests to 1800 
have a bankruptcy act passed which corre- limited to 
sponded to the English law. It was in com- 
pliance with their demands that the first National Bank- 
ruptcy Act was passed April 4, 1800. The Act which 
was limited to five years, was an involuntary law; that is, 
action to make a man a bankrupt had to be brought by 
creditors. Like the English law and other bankrupt 
laws of the time, it was limited to traders — "merchants, 
traders, bankers, brokers, factors, and insurers." Other 
business classes, farmers, mechanics, laborers, and pro- 
fessional men of all classes were excluded from its 
provisions. 

Two principles have since been incorporated into the 
bankruptcy or insolvency laws of the most progressive 
countries: (1) The relief of the honest debtor principles 
from imprisonment; and (2) The cancellation in bank- 
of the debts of the bankrupt if dishonesty has ruptcy^ 
not been proved, and if his property has been ^^^^ ^ ^^' 



L/ 



260 MERCANTILE CREDIT 

surrendered for the benefit of his creditors. The first 
principle has usually preceded the second. Practically 
all European nations of to-day have accepted the first 
principle, but not all of them have accepted the second 
principle. In England, upon the other hand, the dis- 
charge or cancellation of the debts of honest bankrupts 
has been allowed since the reign of Queen Anne, while 
freedom from imprisonment was made possible at the 
beginning of the nineteenth century. 

A distinction has been made as to kinds of business 
with reference to the culpability of the man failing. 
They were classified from the point of view of hazard and 
public utility, and those engaged in precarious occupa- 
tions who failed were treated more leniently by the law 
than those failing in other business pursuits. Under 
the influence of the mercantile system, international 
trade was considered the occupation of greatest utility 
to a nation. It was likewise considered the most hazard- 
ous enterprise. Prior to the nineteenth century all 
bankrupt laws in England related to traders, and 
the bankrupt laws of most of the countries of southern 
Europe to-day are limited to traders. The mercantile 
teachings with reference to the comparative utility of 
enterprises had nowhere been swept away by 1800. 
It should be said, too, that during the eighteenth century 
trade was carried on under hazardous conditions. Credit 
was used more to carry on trade than in enterprises of 
any other sort. Large amounts of capital were not 
needed in manufacture until the industrial revolution, 
and the development of agriculture in the eighteenth 



THE BANKRUPT LAW OF 1800 261 

century was not dependent upon credit. The distinc- 
tion which we find between occupations, by the laws of 
the period, had a real economic basis in the eighteenth 
century. Views to this effect were expressed by Mr. 
James A. Bayard while speaking on the repeal of the law 
of 1800, on February 18, 1803. "The most diligent and 
honorable merchants may be ruined without committing 
any fault. Not so as to the other classes of citizens; 
either the cultivators of the soil, the mechanics, or 
those who follow a liberal profession. They live on the 
profits of their labor, not on profits derived from credit." 
Blackstone^ in his commentaries on the laws of Eng- 
land states clearly the English theory with reference 
to bankruptcy in his time. Referring to the g. , _ 
laws of Rome he says that "The laws of stone's 
England, more wisely, have steered in the views on 

middle between both extremes: providing at °^^^" 

r ruptcy. 

once against the inhumanity of the creditor, 

who is not suffered to confine an honest bankrupt after 
his effects are delivered up; and at the same time taking 
care that all his just debts shall be paid so far as the 
effects will extend. But still they are cautious of 
encouraging prodigality and extravagance by this in- 
dulgence to debtors, and therefore they allow the benefits 
of the laws of bankruptcy to none but actual traders; 
since that set of men are, generally speaking, the only 
persons liable to accidental losses, and to an inability 
of paying their debts, without any fault of their own. 

* Blackstone's Commentaries on Laws of England, Book 2, 
Ch. 3, p. 935, Lewis's edition. 



262 MERCANTILE CREDIT 

If persons in other situations of life run in debt without 
the power of payments, they must take the consequences 
of their own indiscretion, even though they meet with 
sudden accidents that may reduce their fortunes; for the 
law holds it to be an unjustifiable practice for any 
person but a trader to encumber himself with debts of 
any considerable value. If a gentleman or one in a 
liberal profession at the time of contracting his debts, 
has a sufficient fund to pay them, the delay of payment 
is a species of dishonesty, and a temporary injustice to 
his creditor; and if at such time he has no sufficient fund, 
the dishonesty and injustice is the greater. He cannot 
therefore murmur, if he suffers the punishment which he 
has voluntarily drawn on himself. But in mercantile 
transactions the case is otherwise. Trade cannot be 
carried on without mutual credit on both sides: the 
contracting of debts is therefore here not only justifiable 
but necessary. And if by accidental calamities, as, 
by the loss of a ship in a tempest, the failure of brother 
traders, or by the non-payment of persons out of trade, a 
merchant or trader becomes incapable of discharging 
his own debts, it is his misfortune and not his fault. 
To the misfortunes therefore of debtors, the law has 
given a compassionate remedy, but denied it to their 
faults; since, at the time that it provides for the security 
of commerce, by enacting that every considerable trader 
may be declared a bankrupt,for the benefit of his creditors 
as well as himself, it has also (to discourage extravagance) 
declared that no one shall be capable of being made a 
bankrupt, but only a trader; nor capable of receiving 



THE BANKRUPT LAW OF 1800 263 

the full benefit of the statutes, but only an industrious 

trader.'^ Traders, however, were not benefited by 

bankruptcy laws until provision was made for a discharge 

which involved the cancellation of their debts after they 

surrendered their property for the benefit of their 

creditors. There are those who claim that bankruptcy 

laws were of no benefit to traders until they included 

voluntary provisions making it possible for debtors 

to invoke the laws for their own benefit. However, 

American experience with the first National Bankrupt 

Act, as will hereafter be seen, tends to disprove this 

contention. 

The law of 1800 was restricted to merchants and </ 

traders. As in the case of subsequent American bank- ' * ' 

rupt laws and most foreign laws of a similar 

character, the commission by a debtor of acts /^ , ^ 

be de- 
of bankruptcy was necessary to his adj udgment clared 

as a bankrupt. From a general point of view bank- 
the debtor could be declared a bankrupt when ^^P*^ ^^ 
he was guilty of fraud, or when he exhibited a i^qq^ 
disinclination to pay his debts. Specifically a 
debtor could be adjudged a bankrupt for the commission 
of any one of the following offenses: (1) When in order to 
defraud his creditors he left the state where he usually 
resided; (2) when he concealed himself for the purpose of 
fraud; (3) when he conveyed his property for fraudulent 
purposes; (4) when he preferred creditors; (5) when he 
willingly and fraudulently permitted himself to be ar- 
rested; (6) when he remained in prison over two months 
or when he escaped from it for purposes of fraud; (7) 



264 MERCANTILE CREDIT 

when he did not within a reasonable time make provi- 
sion for the payment of his debts after his property had 
been attached. 

The law made a distinction between the fraudulent 

bankrupt and the debtor guilty of bankruptcy without 

fraudulent intent. A debtor could be ad- 

y~®^ * j udged a fraudulent bankrupt, for which offense 

OButor 

could be ^^ could be imprisoned for a term of from one 

adjudged to ten years, and could be ever afterward 
a fraudu- denied the benefits of the act for any one of the 
rupt. following offenses: (1) Refusing, within forty- 

two days after being adjudged a bankrupt 
and receiving notice of the execution of bankruptcy, to 
surrender himself to the commissioners of the bankrupt 
to be examined by them with reference to the state of 
his affairs; (2) refusing to surrender all of his property 
to the commissioners except the minimum allowed by the 
Act; (3) testifying falsely with reference to his property, 
its transfer, etc., and all books, papers, etc., relating 
to it; and (4) upon conviction of a wilful default. If, 
while being examined by the commissioners of bank- 
ruptcy, the bankrupt committed "wilful or corrupt per- 
jury," he could be indicted for it, and was made subject 
to imprisonment for a term of from two to ten years. 

Upon the other hand, the bankrupt who surrendered 
his property to the commissioners to be divided among 
his creditors and who gave a thorough and exact report of 
his affairs, should be discharged. A discharge meant not 
only freedom from imprisonment, but a cancellation of 
all the debts which the debtor then owed. 



THE BANKRUPT LAW OF 1800 265 

The judge of the district court of the United States 
had charge of all cases of bankruptcy arising in the 
district. The petition to make a debtor a gank- 
bankrupt had to be presented to him by a ruptcy 
creditor, who was required to give bond to P'^" 
indemnify the alleged bankrupt for damages ^^® *^^^* 
in case bankruptcy was not established. When the 
petition was filed, it became the duty of the judge to 
appoint commissioners residing in the district, not to ex- 
ceed three, to determine on the question of bankruptcy 
and, in case the debtor was adjudged a bankrupt, to take 
charge of his property. When notice was served upon 
the debtor, summoning him to appear and answer the 
charge of bankruptcy, it was his privilege to demand that 
a jury should inquire into the facts of the case, at which 
time the judge issuing the commission should preside. 
As soon as the debtor was declared to be a bankrupt, the 
commissioners should appoint a time and place for the 
meeting of creditors, at which time they were required to 
prove their debts and elect an assignee or assignees to 
take charge of the debtor's property. As soon as the 
assignee was elected it became the duty of the com- 
mission to transfer to the assignees all the property of 
the debtor, except the minimum allowed by law, which 
was of a personal character. The commissioners were 
also authorized to recover all property illegally con- 
veyed or concealed and to place it in the hands of the 
assignees. 

After four months and within twelve months of 
the issuing of the Commission of Bankruptcy, the assign- 



3 



266 MERCANTILE CREDIT 

ees were required^ to appoint a place of meeting of the 
assignees, commissioners, and creditors, after giving thirty 
days notice. At this meeting accounts were to be bal- 
anced, and the property of the debtor was to be divided 
among the creditors in proportion to the claims of each. 
In case the bankrupt's entire estate was not divided at 
the first meeting, a second meeting was to be called for 
the distribution of the remnant of it within eighteen 
months after the Commission was issued. The allow- 
ances to the assignees for their services were to be made 
by the commissioners, but "the district judges in each 
district shall fix a rate of allowance to be made to the 
commissioners of bankruptcy."^ 

The only property of the bankrupt which was not 
required to be surrendered were the clothing, beds, and 
I bedding of himself and family. If the assets 
amount of ^^ ^^® bankrupt paid 50 per cent, of his debts, 
property then he was allowed 5 per cent, of the net 
allowed a value of his estate, provided that this amount 
did not exceed $500. If his estate paid 75 
per cent, of his liabilities, he was allowed 10 per cent, 
of the proceeds of his estate, if this amount did not ex- 
ceed $800. But if the assets of the bankrupt did not 
pay 50 per cent, of his debts, then he was to receive 
what the commissioners would allow, the amoimt not to 
exceed $300 or 3 per cent, of the net value of the estate. 
If the bankrupt was not proved to be dishonest, his debts 
were to be cancelled after his estate was" surrendered 

* A single assignee might have control of the estate. 
2 Section 47. 



THE BANKRUPT LAW OF 1800 267 

for the benefit of his creditors. The bankrupt, however, 
was to lose all title to the allowance of a portion of his 
property, and a right to a discharge which freed him 
from the payment of the balance of his debts, if it could 
be proved that he had permitted a creditor to present 
a fictitious or unfair claim. He was to suffer the same 
penalty if he had lost at any one time fifty dollars, or 
$300 in all, in gaming or wagering. A bankrupt who 
failed a second time could be relieved from punishment, 
but he could not be discharged from the payment of 
all his debts, unless his assets paid 75 per cent, of his 
obligations. 

In one sense the law was intended as an experiment as 
its operation was limited to five years. However, it 
was repealed December 19, 1803, after it had been in 
force somewhat over three years. The vote in the 
Lower House, 94 to 13, showed that the sentiment there 
against the law was very strong.^ 

The chief arguments for the retention of the law, were 
as follows: 

1. The correct policy would permit the law to expire 
by its own limitation. As it was intended as an experi- 
ment, five years should be allowed to test Reasons 
its value. General commercial distress de- for re- 
manded the kind of law which was passed in tainingthe 
1800. Radical amendments, which experience ^^* 

has proved necessary, should be incorporated in the law 
and it may then be of permanent value. 

2. Well-informed writers and merchants believe that 
^ In the Senate the vote in favor of repeal was 17 to 12. 



268 MERCANTILE CREDIT 

more privileges should be given to men engaged in trade 
than in other callings. The exemption of property from 
the payment of just debts is not a violation of justice in 
certain circumstances in the case of commercial concerns. 
Although inability to pay debts ordinarily results from 
idleness or imprudence, in the case of commerce risks are 
so great that nothing can guard against failures. 

3. Relief to unfortunate worthy traders cannot be 
granted by states, since their laws are various and contra- 
dictory. Of all occupations, trade is widest in range, 
and laws governing trade should be equally wide and 
extensive. 

4. Credit and trade are the chief sources of wealth 
accumulation. It would be unwise to have regulations 
which would hinder their natural development. 

5. The bankrupt law did not always operate in favor 
of the debtor, as the opponents of the law claimed. 
Under the insolvent laws of the states the debtor can 
determine when he will go into insolvency. Under the 
national bankrupt law the debtor cannot decide when he 
will go into bankruptcy, while creditors can take action 
to stop the reckless and hazardous career of a debtor by 
initiating proceedings to make him a bankrupt. 

6. The bankrupt law lessens the temptation to fraud 
since there is less opportunity for concealment of fraudu- 
lent conduct. Moreover, if it is considered desirable, 
state legislatures may, without violating the national law, 
pass laws providing drastic treatment for fraud. 

7. The primary purpose in providing by constitutional 
enactment for the giving of power to the national govern- 



THE BANKRUPT LAW OF 1800 269 

ment to pass bankruptcy laws, was to establish the na- 
tional credit upon a firmer basis. The repeal of the 
law will mean a return to the partial and inadequate 
system of the states with reference to credit and debts. 

8. If the law was retroactive as to the relations be- 
tween debtors and creditors, as many claim, and con- 
sequently injurious, its repeal before the expiration of 
five years will change again the relations of debtors and 
creditors, and on this account be harmful. 

The arguments in favor of the repeal of the law were 
the following: 

1. As Congress was responsible for the evils of the 
law, which were numerous, it would be wrong to permit 
the law to expire by limitation. Those who ordinarily 
try to avoid bankruptcy are now placing themselves in 
a position to get its benefits. 

2. The bankrupt law had a bad effect on the morals of 
the mercantile world; it created credits and Arguments 
excited a spirit of extravagance in expenditure, for the 
The opponents of the law pointed out that as repeal of 
a result of the law small traders were often ® *^' 
found living in ease and great luxury. 

3. The provisions of the law operated in favor of the 
debtor. Although the commission of bankruptcy was 
always taken out at the instance of a creditor, it was 
pointed out that the creditor who took the initiative in 
most instances was a friend of the debtor who acted 
under his guidance. The commission of fraud led to 
demoralizing consequences. 

4. The bankrupt law could not be carried into effect 



270 MERCANTILE CREDIT 

successfully without a resort to a class of laws to prevent 
fraud, passed by England and other countries, which 
were so drastic in character as to be abhorrent to our code 
of morals. 

5. The expenses of going through bankruptcy were out 
of proportion to the assets to be divided, owing to the 
high fees of the commissioners and assignees. 

6. Trade does not need any special protection. The 
commercial world is always fair to honest debtors. 

7. The law was harmful in that it enlarged the powers 
of the federal courts and of the general government. It 
was claimed that many powers were given the general 
government by the Constitution without a view to their 
exercise. 

8. Of most weight in securing the repeal of the law was 
the contention that it was partial in its application, since 
it discriminated in favor of the merchant and trader to 
the detriment of the farmer and mechanic. If the 
merchant failed, he could be relieved from the payment of 
all his debts, whereas if the farmer or mechanic failed, he 
was under obligation to cancel every item of his indebted- 
ness. If the farmer loaned to the merchant and the lat- 
ter failed, the farmer was then unable to collect a part 
of the debts due him. If on account of the failure of 
the merchant the farmer failed, the latter was afforded 
no protection whatever by the law. It was stated that 
our law was a modified form of the English law at that 
time, and it was argued that as our economic conditions 
were very different from those of Great Britain a good 
law there might prove to be a very poor one here. There 



THE BANKRUPT LAW OF 1800 271 

the dominant industry was commerce, and hence the legis- 
lative favoritism to the mercantile classes. Here the 
chief industry was agriculture, and it was unjust and 
detrimental to the general good to discriminate against 
the farming class. It was claimed that a preferred sys- 
tem that treated all insolvents alike had been adopted 
by some of the states. 

9. Of importance, secondary only to the last argument, 
was the contention that while justice dictated the 
liberation of the body of the bankrupt, that same justice 
demanded that the obligation to pay just debts was 
eternal. When the law was passed, it was claimed to be 
retroactive and to be the cause of great harm to creditors 
by enabling debtors to be discharged from the payment 
of obligations incurred before the passage of the Act. 

The clause in the law which relieved from seizure the 
property acquired by the bankrupt after he was dis- 
charged, arose from the newer credit relations and was in 
the interests of the public welfare. The discharge of the 
debtor formerly meant simply relief from punishment. 
It was assumed that he was under both moral and legal 
obligations to pay his debts. Relief from the legal 
obligation to pay was looked upon by many as the be- 
stowal of an unwarranted and dangerous favor. It was 
held that if the government relieved debtors from paying 
their debts in full, it permitted the violation of contracts, 
and that its effect would be demoralizing. It was 
claimed that in making it easy for the debtor to go 
through bankruptcy proceedings, by which a portion of 
his debts could be cancelled, the government would 



272 MERCANTILE CREDIT 

work harm upon industry since carelessness in borrow- 
ing and in investing would result. That an effective 
protest should be made against the release of the honest 
bankrupt from the payment of his future earnings shows 
how little headway our modern ideas of credit and busi- 
ness had made at the time. 



CHAPTER XVII 

BANKRUPTCY ACT OF 1841 

The second National Bankruptcy Act of the United 
States was passed Aug. 18, 1841, went into effect Feb. 1, 

1842, and was repealed on the 3rd of March, 

1843, having been in operation slightly over ^^ ^ 
thirteen months. Shortly after the repeal second 
of the law of 1800, agitation was begun for a National 
new bankruptcy act. Interest in such a law ^^^^^P* 
was always strongest after periods of depres- whatpro- 
sion, since debtors and their friends were par- posed Acts 
ticularly vigilant in importuning Congress to ^^®^ *® 
pass a bankruptcy act which would remove jjgj^^ 
the burdens from the former class and permit 

them to begin business again. Bankruptcy Bills 
were frequently before Congress, but the friends of such 
measures were particularly aggressive in 1818, 1820, 
1822, and 1826. Most of these measures were copied 
after the English law then in force, and all the friends of 
the measures appealed to English experience to prove the 
need of such a law here. In nearly all cases the proposed 
measures limited the benefits of the law to traders, and in 
most cases they were involuntary measures. All of 
them proposed three things: 1. The surrender of the 
property of the debtor for the benefit of his creditors; 2. 
the relief of the debtor from punishment if dishonesty 

273 



274 MERCANTILE CREDIT 

had not been proved; 3. the discharge of the debtor 
from the obligation to pay his debts. In all these dis- 
cussions, the ^^ State Rights" advocates were strongly- 
opposed to a national bankrupt act, whereas in general 
the loose constructionists favored such a law. 

It was urged that the trader or merchant ought to be 
governed by a different set of rules than that governing 
farmers, mechanics, wage-earners, professional men, etc. 

The business of the traders and merchants is 
traders J^ore speculative and hazardous than that of 
were the latter classes and in the nature of things 

made a must be so. With the former it was claimed 
specia ^^^^ failure is frequently due to misfortune 

and miscalculation; and, where this is true, 
the welfare of both the state and the creditor class as 
well as that of the debtors demands the discharge of 
the debtor, a thing which relieves his future earnings 
from attachment to pay his debts. 

In the discussion in the House in 1822, it was pointed 
out that the first Bankruptcy Act of England was passed 

in the reign of Henry VIII; that this Act 

Foreign then remained in force through all political 
experi- 
ence. ^^^ industrial vicissitudes; and that the only 

changes which were made in it consisted in 
lessening the rigor of the law with reference to debtors. 
Other nations had bankruptcy laws with varying degrees 
of severity. The chief difference between them con- 
sisted in the required proportion and number of creditors 
whose opinion, in regard to the effects of the debtor, 
should control and bind the rest. 



BANKRUPTCY ACT OF 1841 275 

In 1819 a report was made by the chancellor and 
judges of the Supreme Court of New York to the Legisla- 
ture of that state on its insolvency law. This 
body reviewed the insolvency legislation of York's 
New York beginning with the law of 1784. experience 

It commented favorably on the Act of 1813, ^ithinsol- 

vent lfl.ws 
which required every insolvent debtor to 

make application for relief in the county where he resided 
or was imprisoned. It was pointed out that the insolvent 
law in New York was intended to relieve the debtor 
from the payment of his debts and to free him from 
imprisonment after he had surrendered his property for 
the benefit of his creditors. At this time, in New York, 
those not free holders charged with small debts could not 
be imprisoned for a longer period than 60 days; and any 
one owing debts less than $500 might be discharged, 
whereas if one owed debts larger in amount, an appli- 
cation for a discharge must be made. This committee 
recommended the repeal of the State Insolvency Law, 
claiming that a National Bankrupt Act would be superior 
to the insolvency laws of the states. 

It was claimed that commercial interests were in need 
of a law to keep the debtor "in failing circumstances, 
from disposing of his property partially among 
his creditors, or from fraudulently wasting it, ^^^^^^ 
or converting it to his own use."^ The ruptlaw. 
preservation of the debtor's estate and its 
protection in the interests of the creditors were to be the 
chief factors in a national bankrupt law if this committee 

» Niles Register, Vol. 16, p. 85, Sup. 



276 MERCANTILE CREDIT 

had the makmg of the law. It was held moreover that 

a permanent law to relieve debtors would be demoralizing. 

The chief argument for a bankrupt Act at this time 

was that the act would discharge debtors who had 

become involved in debt owing to extravagant 

Reasons speculation and the unsettled industrial con- 
assigned 
for pass- ditions. It was claimed that the Embargo, 

ing a Non-intercourse Acts, and the War of 1812-14 

bankrupt jj^^^ ruined thousands. After the war the 

1822. opening up of new lands with the attending 

land speculation, and the unsettled banking 
and monetary situation of the country, had caused many 
more to fail. Many of these were not fraudulently 
culpable, it was argued, but were simply unfortunate; 
and for this reason their debts should be cancelled and 
they should be permitted to start in business again. 
Commercial prosperity and even the interest of the 
creditors themselves demanded this. 

The arguments of the opposition, however, at this 
time prevailed. They argued that the cancellation of 
Arguments ^^^^^ would violate contracts and the effect 
of those would be demoralizing. They insisted that 
opposed to such a law would be an invitation to conduct 

hazardous enterprises and then repudiate 
just debts in case of business failure. They claimed 
that the industrial conditions in England were so different 
from those in America that a good law there might be 
a very poor one here, and that it was unwise to follow 
the English precedent. Some claimed that the bank- 
ruptcy^ legislation in England was a failure. Quotations 



BANKRUPTCY ACT OF 1841 277 

were made from the report of the English commission of 
bankruptcy of 1818 to show this. The English law was 
limited to traders, but by a loose construction of the 
law it was extended to many other classes. It was 
pointed out that it would be impossible to tell who 
were traders and who were not. If the proposed law 
included others than the trading class, it would demoral- 
ize those who had absolutely no need for a bankruptcy 
law. The law before Congress in 1822 contained a clause 
extending the provisions of bankruptcy to ''other per- 
sons actually using the trade of merchandise, by buying 
and selling, in gross or retail.''^ It was claimed that this 
clause would include the miller who converts wheat 
into flour, and the distiller who purchases grain for 
manufacturing purposes, and many others who would 
not logically belong to the merchant or trading class. 
In 1827 another Act was introduced to include farmers 
within the provisions of the law. The influence of the 
law on the farmer in withdrawing him from his regular 
occupation and tempting him into the questionable 
occupation of speculation in lands and other fields for 
which he had no qualifications, was dwelt on at consider- 
able length. Between the repeal of the law of 1800 and 
the passage of its successor in 1841, important decisions 
were made by the courts affecting bankruptcy, deci- 
sions which determined in large measure the subsequent 
course of legislation on bankruptcy. 

Those who were opposed to the extension of power 
by the United States Government saw in the enactment 

1 Abridged Debates, House, Vol. 7, p. 280. 



278 MERCANTILE CREDIT 

of a national bankrupt law another encroachment of 
the federal power on the prerogatives of the states. 
Since the insolvent laws of the states were in 
Arguments force so long as there was no national bank- 
of those j.^p^ Yaw, and since the latter abolished them 
extension where the provisions of these laws were in 
of power conflict with the national law, the States 
by the Rights advocates viewed national legislation 

Govern- ^^ bankruptcy with much concern. It was 
ment. argued that without a national bankrupt 

law the federal courts are chiefly concerned 
with the settlement of controversies between citizens of 
the different states. One debater claimed that the 
national law would effect a judicial consolidation of 
the Union, and would introduce radical changes in the 
relations between the state and federal courts. This 
contention, however, proved to be unfounded. 

It was pointed out that a national law would impose 
heavy burdens on both debtors and creditors in attend- 
ing the federal courts. At this time. North 
Inconven- 
ience of Carolina constituted but one federal district; 

attending consequently all the citizens of the state 
federal would be required to attend the same bank- 
ruptcy court. Pennsylvania was divided into 
two districts, the sessions of each court being held at 
Philadelphia and Pittsburg, cities 300 miles apart. 
Under modern conditions with many railways and fast 
trains, a burden almost unbearable would be imposed on 
people to go the distance required of residents of those 
districts at that time. But in the early twenties there 



BANKRUPTCY ACT OF 1841 279 

were no railways anywhere, and the highways over 
which the people would have to travel were in such a 
condition as to make attendance at these courts for 
the great majority of them, wholly impracticable. 
These facts were pointed out in these discussions, and 
they furnished the chief reasons for the defeat of the 
proposed laws. 

The friends of these measures claimed that the clause 
requiring the consent of two-thirds of the creditors 
for the distribution of the estate of the debtor and for 
his subsequent discharge, adequately safeguarded the 
interests of the creditors. The opponents of these laws 
claimed that this clause offered no safeguard whatever; 
that the remoteness of the federal courts from the places 
of business of most of the creditors would prevent them 
from attending its sessions, and that the discharge of the 
debtor and the cancellation of his debts, would be 
made relatively easy. It was thus claimed that while 
these measures pretended to give adequate protection 
to the creditors, this protection was only apparent and 
not real. However, the arguments of the advocates of 
a national bankrupt law proved unavailing until after 
the crisis of 1837. 

The right of a state to legislate on bankruptcy when 
a national law is in force, and the distinction between 
insolvency and bankruptcy laws and the right of a state 
to grant a discharge to a debtor when debts were owed 
a creditor in another state, were frequently mooted 
questions. The first two of these were answered by the 
Supreme Court of the United States in 1819, through 



280 MERCANTILE CREDIT 

Chief Justice John Marshall in the famous case of 
Sturgis vs. Crowninshield.^ 

On the first proposition the court held that '*The rights 

of the states to pass bankrupt laws are not extinguished 

by the enactment of a uniform bankrupt law 

Court deci- ^^iroughout the Union by Congress, for they are 

sions on suspended only so far as the two laws conflict. 

bankrupt States are not forbidden to pass such laws. 

. . " It is simply a question of the exercise of such 

power by Congress." State laws have always 

been effective during the absence of a national law. 

When a national law is passed, they cease to be operative 

but go into effect again when the national law is repealed. 

State laws on bankruptcy not in violation of the national 

law are also held to be valid by this decision. 

With reference to the second proposition it was gen- 
erally assumed that an insolvent law dealt with the per- 
son of the bankrupt, and the bankrupt laws dealt with 
his property. It was also held that insolvent laws are 
enforced by debtors, and bankrupt laws by the creditors. 
The decision of the Chief Justice on these points is 
as follows:^ "But if an act of Congress should dis- 
charge the person of the bankrupt, and leave his future 
acquisitions liable to his creditors, we should feel much 
hesitation in sajdng that this was an insolvent, and 
not a bankrupt act; and therefore unconstitutional. 
Another distinction has been stated, and has been uni- 
formly observed. Insolvent laws operate at the instance 

^ Sturgis vs. Crowninshield, 4, Wheaton, 122. 
2 Sturgis vs. Crowninshield, 4, Wheaton, 122. 



BANKRUPTCY ACT OF 1841 281 

of an imprisoned debtor; bankrupt laws operate at the 
instance of a creditor. But should an act of Congress 
authorize a commission of bankruptcy to issue on the 
application of a debtor, a court would scarcely be 
warranted in saying that the law was unconstitutional, 
and the commission a nullity/' This decision of the 
Chief Justice shows clearly that there is no necessary 
distinction between an insolvent and a bankrupt law, 
based either upon provision of the law or the conditions 
of its enforcement. This decision established also the 
constitutionality of a voluntary bankrupt law. 

The third proposition in dispute, the right of a state 
insolvency law to discharge a debtor from obligations 
owed citizens of another state, was settled by the case 
Ogden vs. Saunders brought before the Supreme Court in 
1827.* The decision established clearly two points: 
First, the right of a state to discharge by an insolvency 
law, a debtor from obligations owed citizens if con- 
tracted subsequently to the passage of the law; and 
second, the unconstitutionality of an insolvency law 
which discharges a debtor from obligations owed in 
another state, or contracted prior to the enactment of 
the law. 

In 1837 and for several succeeding years, the country 
was visited by an industrial depression far more serious 
than any that preceded it. This was due to 
a variety of causes, prominent among which h1^^^ ^ 
were the over-speculation in lands and other 
securities, an inferior monetary system, the adoption of 

1 Ogden vs. Saunders, 12, Wheaton, 213. 



282 MERCANTILE CREDIT 

the policy by the government, with but little warning, 
that payment for government lands had to be made in 
specie, and the failure of crops in the United States in 
1835, 1837, and 1838. Thousands of people in all walks 
of life failed, and recuperation from the panic was ex- 
ceedingly slow. 

All the arguments for a national bankrupt law which 

would cancel the obligations of debtors heretofore made 

after periods of temporary distress, were now 

r~® repeated with great vigor. Finally after a 

1841 WAS 

passed. ^^^S ^^^ heated discussion in which charges 

were made bordering on corruption, the bill 
passed both Houses of Congress and was signed by the 
President, August 19, 1841. The measure at first con- 
tained a provision requiring the Act to go into operation 
shortly after its passage. This feature was amended so as 
to postpone the time for it to go into effect until Febru- 
ary 1, of the following year, with the result that an un- 
successful attempt was made to repeal the law before 
it went into operation. The bill was passed at an extra 
session, and Congress had convened again before the Act 
became a law. 

This Act provided for voluntary as well as involuntary 
bankruptcy. Any one could become a voluntary bank- 
^ . . rupt who owed debts not ''created as a conse- 

PrOVlSlOnS ^ r ■, r ■, - 1 T rr> 

of Act. quence of a defalcation as a public omcer, or 
Voluntary while acting in a judiciary capacity as execu- 
^*^" tor, administrator, guardian, or trustee," and 

who conformed to certain definite conditions 
laid down by the law. He was required to make a list 



BANKRUPTCY ACT OF 1841 283 

of his creditors, give their residence, state the amounts 
owed each, furnish an inventory of all of his property 
and state its location. After he had furnished these 
statements under oath, together with a declaration of 
his inability to pay his debts, the court was empowered 
to declare him a bankrupt. 

The voluntary feature of the law was new in our legis- 
lation and met with great opposition. It was modeled 
after the English law of 1827, which provided for volun- 
tary bankruptcy.^ It was pointed out in the discussion 
in Congress that voluntary bankruptcy prevailed in 
England long before the passage of her so-called volun- 
tary Act; and that at this time England legalized what 
had long been the custom there under involuntary 
bankruptcy. A failing debtor would arrange with a 
friendly creditor to commit an act of bankruptcy and 
have the creditor bring suit in bankruptcy. By this 
method it was within the power of debtors to determine 
when and how they could become bankrupts without a 
voluntary law. The friends of voluntary bankruptcy 
claimed that what had been the custom there could be 
practised here, and that no new or extraordinary privi- 
leges were given debtors by the Voluntary Bankrupt Act. 

The law of 1841 limited involuntary bankruptcy to 
the merchant class — including "merchants, bankers, 
factors, brokers, underwriters, and marine involun- 
insurers, who owed debts to the amount of tary bank- 
$2,000 and were guilty of fraud.'' The peti- ^P^^^' 
tion of one or more creditors to whom not less than 

1 Abridged Debates, Vol. 14, p. 713. 



284 MERCANTILE CREDIT 

$500 was owed, was adequate to make a debtor a 
bankrupt. The commission of any one of the following 
offenses would make a debtor an involuntary bankrupt: 
(1) To depart from the state with intent to defraud 
creditors; (2) to conceal himself to avoid arrest or to have 
himself fraudulently arrested or to have his goods taken 
fraudulently in execution; (3) to conceal or to remove his 
goods to keep them from being detached or taken in 
execution; (4) to make a fraudulent conveyance. When 
a person was declared to be a bankrupt under these 
conditions, upon petition to the court he was entitled to a 
trial within ten days to determine the facts of bankruptcy. 
If the bankrupt lived a great distance from the place 
where the court was held, the court might at its discre- 
tion, have the bankruptcy proceedings held in the county 
where the bankrupt resided. This feature was incor- 
porated into the Act partly to meet the objections of 
those who insisted that a National Act imposed heavy 
and unnecessary burdens on those who were compelled to 
travel long distances to attend the federal courts. 

Transfers or conveyances of property for the purpose 
of preferring creditors were violations of this Act. All 
Prefer- payments or transfers made to those not bona 
ences. fide creditors or purchasers were considered 

Penalties, fraudulent acts. In these cases it was made 
the duty of the assignee to recover property fraudulently 
conveyed as assets of the bankrupt. The bankrupt 
guilty of the above frauds was to be refused a dis- 
charge in bankruptcy. All dealings and transactions of 
a bona fide character made by the debtor more than 



BANKRUPTCY ACT OF 1841 285 

two months before the petition to make him a bank- 
rupt was filed, were not invalidated by this Act if the 
other party to these dealings had no knowledge of a 
prior Act of bankruptcy or of the intention of the 
debtor to take advantage of the bankrupt Act. If a 
voluntary bankrupt preferred a creditor subsequent to 
the first of January preceding the passage of the Act 
he could not be discharged unless a majority of his 
creditors who had not been preferred, gave their con- 
sent to his discharge. 

After the petition of bankruptcy was filed it was the 
duty of the court to appoint an assignee who should take ^ 
control of the property and property rights 
of the bankrupt. The assignee was required n^e^t of 
to make sales, transfers, etc., as the court assignees. 

ordered. All moneys received were to be "^heir 

Quties* 
transferred to the court within sixty days after 

their collection. A division of the assets among cred- 
itors was to be made as often as once every six months. 
The assignee was given power to redeem mortgages or 
other pledges and to collect all moneys owed the bank- 
rupt. For the purpose of closing estates as early as 
possible the court could require the assignee to reduce 
the property of the bankrupt to money and to divide it as 
early as was possible in the interests of the creditors. 

It was provided that there should be exempted from 
seizure "the necessary household and kitchen ^■ 
furniture, '^ and such other articles and neces- ^^^g^ 
saries as the assignee having reference to the 
circumstances of the bankrupt should designate, 



w/ 



286 MERCANTILE CREDIT 

but altogether not to exceed the sum of $300. The 

wearing apparel of such bankrupt, and that of his wife 

and children were also to be exempted. 

The bankrupt who surrendered his property and 

carried out the orders and directions of the court and 

^. ^ was not guilty of fraud, was entitled to a full 

Discharge. ,. ^ , , , ... 

discharge by the court unless a majority in 

number and in value of his creditors who had proved 
their debts had filed written objections to it. The dis- 
charge and certificate of discharge could not be granted 
until the court published in a newspaper for seventy days 
a notice to all creditors to appear at a particular time and 
place and show reason why a discharge should not be 
given. The court might, if it chose, notify creditors 
personally if they lived a long distance from where the 
sessions of the court were held. 

The opponents of the law seriously objected to this 
feature. They claimed that in every country where a 
bankrupt law was in force, the consent of from one-half 
to four-fifths of the creditors in number and amounts 
owed, was necessary to a discharge. In the above named 
provision the debtor could be discharged unless over one- 
half of his creditors objected to it; and the method of 
informing creditors of the application for a discharge 
was not such as would insure the enlightenment of a 
very large percentage of them on the action taken by 
the debtor. 

Debtors guilty of fraud as defined in the Act could not 
be discharged. Involuntary bankrupts who failed to 
keep proper books could not be discharged. When a 



BANKRUPTCY ACT OF 1841 287 

discharge was refused by the court on account of ob- 
jections of creditors or because of fraud, the bankrupt 
might, if he petitioned within ten days, appeal the case 
to the next circuit court and demand a trial by a jury. 
When once discharged a debtor could not be discharged 
a second time unless his assets paid 75 per cent, of his 
debts. 

The District Court in every district, had jurisdiction 
over bankrupt cases. Petitions in bankruptcy were to 
be made to the District Court where the bank- qq^^^ 
rupt resided. After the petition, notices of having 
it were to be published by the court in one junsdic- 
or more newspapers of the district at least 
twenty days before the hearing. At this meeting 
creditors had to establish their claims. The Circuit 
Court within the district had concurrent jurisdiction 
with the District Courts in all suits brought by the as- 
signee with reference to the bankrupt estate or by any 
one else against the assignee. All suits to be valid had 
to be brought within two years after the decree of 
bankruptcy. 

The preference feature was introduced in this Act. 
In the distribution of the assets of the debtor, the follow- 
ing debts were preferred in the order named: 

(1) Debts due to the United States; (2) debts ^ ^^f 

preferred 
due the sureties of a debtor; (3) wages of debtors. 

laborers not to exceed $25 for services per- 
formed within six months of the bankruptcy of the em- 
ployer. It was claimed in the House that one of the 
purposes of the law was to treat all creditors alike, and 



288 MERCANTILE CREDIT 

that in preferring certain creditors its fundamental 
purpose was defeated. It was insisted also that it was 
unfair to others to make the United States Government 
a preferred creditor. 

Since the Act was passed in the summer of 1841 at a 
special session, and since it was not to be enforced until 
February 1, 1842, ample opportunity was given to re- 
peal it before it went into effect. It was claimed that 
on one day it was laid on the table by a majority of 11, 
and the following day after a night when the wine flowed 
freely, it was taken from the table and passed. It was 
claimed also that the friends of the bankruptcy Act 
held up the Land Distribution Bill and prevented the 
passage of the latter act until after the former had been 
passed. The unsuccessful attempt to repeal the law 
before it went into operation did not hinder its opponents 
from beginning an early campaign for its repeal. They 
felt that the experiences of the summer and early au- 
tumn in which hundreds of those who were insolvent 
went through bankruptcy proceedings, would win to 
their side many of those who had been in sympathy 
with the law. The undue haste in taking advantage 
of the law's voluntary features and in insisting on a dis- 
charge from debts, was responsible for the change in 
sentiment. 

The constitutionality of the law again concerned the 
members of Congress. The chief points of attack in this 
regard were its voluntary and retroactive features. The 
law was objected to in these respects, not only on con- 
stitutional grounds, but in the interests of public policy. 



BANKRUPTCY ACT OF 1841 289 

It was argued that the law was unconstitutional on 
account of its retroactive features. One senator (Ben- 
ton of Missouri) argued that the discharge of . 

11 .11 r 1. Arguments 

a debtor without the consent of creditors ^jj^t the 

or a certain percentage of them was unconsti- law was 
tutional, and was not the practice of any of ^^consti- 
the progressive countries which have bank- 
ruptcy laws. The same authority held that the volun- 
tary provisions interfered with the insolvency laws of 
the states and was on this account, unconstitutional. 
It was claimed that the Constitution of the United States 
gave Congress the power to pass bankruptcy and not 
insolvency laws. It was also claimed that the right of 
states to pass lien laws was paramount and this right 
was prohibited by the National Act. 

On the other hand, it was argued that it was too nar- 
row a construction of the Constitution to limit the power 
of Congress in bankruptcy legislation to the kind of a 
law England had when the Federal Constitution was 
adopted. A progressive state would allow some elas- 
ticity in legislating under the Constitution. It was also 
maintained that one cannot draw a hard and fast line 
between an insolvent and a bankrupt law. In general, an 
insolvent law discharges the person of a debtor only, while 
a bankruptcy law is more general, and may not only dis- 
charge the person of a bankrupt but also free him from 
the payment of his debts after he has surrendered all his 
property to pay his debts. It was also asserted that the 
legal requirement for the consent of a majority of cred- 
itors in number and in value to discharge a debtor, was 



290 MERCANTILE CREDIT 

unnecessary from a constitutional point of view. These 
arguments on the constitutionality of the bankrupt law 
were made in apparent ignorance of the Supreme Court 
decisions above referred to. 

Some of the opponents of the law insisted that it 
had been responsible for all kinds of injustice, ine- 
quality, and fraud and for these reasons it should be 
repealed as soon as possible. It was maintained that 
many who had heretofore been solvent were ruined by re- 
lieving their debtors from the liability to pay their debts. 

Those who opposed the repeal of the law held that 
its evils could be traced chiefly to its retroactive 
features. Some claimed that it should be 
f rtT 1 amended by repealing its voluntary provi- 
sions. Others argued with a great deal of 
wisdom that the worst evils of the law had already been 
experienced, and that if it were repealed now, the chief 
sufferers would be those who were made insolvent by 
the undue haste with which their debtors went through 
the bankruptcy court, and who were consequently reduced 
to bankruptcy by the law itself. * The opponents of repeal 
contended that these people should now be given a fair 
chance to secure the benefits of the Bankruptcy Act 
themselves. It was claimed that at this time the law 
would be administered primarily with respect to prospec- 
tive cases, those with which the law should ultimately 
deal. It was held, moreover, that those who would vote 
to repeal the law would be responsible for future retroac- 
tive legislation with all the abuses which such legislation 

* See address, Buchanan of Pennsylvania, A. D., Vol. 14, p. 713. 



BANKRUPTCY ACT OF 1841 291 

entails. The sentiment favoring repeal was too strong 
at this time, and no argument could withstand it. 

The preamble^ to the bill providing for the repeal 
of the law introduced in the Senate by Mr. Benton on 
December 7, is as follows: "Whereas the 
Bankrupt Act of 1841 is unconstitutional and 
immoral, and violates the rights of the states and of 
individuals, and is invalid and void, and ought not to be 
permitted to remain on the Statute-book." 

The bill which passed the House permitted the cases 
which were pending to take their course under the law.^ 
"The repeal shall not extend to or affect any Disposi- 
case which, at the time this Act goes into tion of 
effect, shall be pending before any court; nor pending 
to any proceeding which, at said time, shall ^^^^^' 
have been in progress, under and by virtue of the said 
Act hereby repealed."* The motion to repeal passed the 
House by a vote of 140 to 71. 

When the House bill went to the Senate, a motion was 
offered by Senator Benton striking out the above section 
which permitted all bankruptcy cases pending when 
the Act was repealed, to be settled in accordance with the 
law. His amendment substituted certain clauses that 
were in the Senate bill he introduced, clauses that fol- 
lowed closely the methods of closing estates provided 
by the law of 1800. 

1 Benton's speech, A. D., Vol. 14, p. 610. 

2 Abridged Debates, Vol. 14, p. 658. 

2 Prior to this vote a motion to amend the Bankruptcy Act by 
repealing the voluntary features was defeated by a vote of 136 
to 73. 



292 MERCANTILE CREDIT 

These required the consent of two-thirds of one's 
creditors for a discharge, that the insolvent laws and the 
lien laws of the states remain in force, that a person 
subject to involuntary bankruptcy should not have the 
privilege of voluntary bankruptcy, and that the opera- 
tions of the law be prospective only. In the discussion 
it was claimed that the amendment requiring changes in 
legal procedure for pending cases would cause a great 
deal of confusion, and that the repeal of the law which 
they thought was imperative at this time would be de- 
layed and would possibly be defeated by the fact that 
the law was sent back to the House. The amendment 
was defeated and the House bill was passed by a vote 
of 32 to 13. The law was repealed with the exception 
that cases already pending were to be settled according 
to the provisions of the law. 



CHAPTER XVIII 
BANKRUPTCY ACT OF 1867 

For twenty-four years after the repeal of the National 
Bankruptcy Act in 1843 the country was without a 
bankruptcy law. Within this period the Agitation 
friends of National bankruptcy legislation for a third 
had before Congress various bills, all of which bankrupt 
were rejected. A National Bankruptcy Act 
was on the program of the Pierce Administration in 
1853. In 1864 an unsuccessful effort was made by 
Congressman Thomas A. Jenckes of Rhode Island, a 
champion of bankruptcy legislation to secure the passage 
of a law. Since the sentiment favorable to such legis- 
lation is always strongest after periods of industrial 
depression, the settled conviction was reached at the 
close of the Civil War that the time for a National 
Bankruptcy Act had arrived. The debates on this 
subject in Congress in 1866-67 show that the form of 
the Act was the only subject in question. 

The first Bill introduced in the House after the war, 

was defeated March 28, 1866, by a vote of 73 to 59. 

However, a motion to reconsider the measure . , , 

A bank- 
was soon afterward passed by a vote of 83 ^^^^ 

to 45. This measure provided for both measure 
involuntary and voluntary bankruptcy, and jlefeated 
according to its provisions a large body of 
marshals and other officers were required to enforce the 

293 



294 MERCANTILE CREDIT 

law. This latter feature was objectionable to many, 
others opposed the extension of the involuntary provi- 
sions to all classes, and still others objected to the laws 
retroactive features. It was claimed in the debate that if 
the proposed Bill became a law a "swarm of office holders 
would swoop down on the estates of bankrupts, and noth- 
ing would be left for the creditors."^ The same speaker 
insisted that Congress was not asked for a compulsory 
Bankrupt Act, and that it would be a great injustice to 
inflict compulsory bankruptcy on mechanics and farmers. 
Congress was asked to pass a law to relieve unfortunate 
debtors from the obligation of paying their debts with 
future earnings, since a provision for this pur- 
Should the pQgg ^^g considered of paramount importance, 
laws of the '^^^ House was at first opposed to any inter- 
states be ference with the exemption laws of the states, 
aboUshed which as they stood left the debtor a mini- 
Bai^jTu^ mum amount of property after going through 
Act? insolvency proceedings. On this subject the 

Senate and House clashed. It was claimed 
in the House that contracts between debtors and credi- 
tors were made with a full knowledge of the exemption 
laws of the states, and that no harm could come to a 
creditor if these laws of the states were observed in the 
National Bankruptcy Act. It was argued, moreover, 
that the national government did not have the consti- 
tutional right to set aside the exemption laws of the 
states. In the Senate it was held that a recognition of 

* Speech, Rep. Paine: Congressional Globe, 1865-66, Part 2, 
p. 1689. 



BANKRUPTCY ACT OF 1867 295 

the exemption laws of the states would defeat uniformity 
in bankrupt legislation and practically incorporate the ex- 
emption laws of the states into the National law. It was 
urged too that the annulment of these laws of the states 
would not work an injury to debtors, since the latter 
would receive something from the National Act in the 
form of a discharge from future debts, a discharge which 
could not be granted by the states in any of their laws. 

The sectional question, which at this time was ex- 
tremely bitter, played a part in the discussion. Creditors 
of northern cities petitioned Congress to pass 
a National Bankruptcy Act to assist them in sectional 
collecting debts in the South. The most question 
valuable property of the South was in estates, ^^ *^® 
and the southern land owners were influential P'°P°^® 
in the state legislatures. It was claimed that 
if creditors should fail to collect claims in state courts, 
they would succeed in the United States Courts under a 
national bankrupt law. The sectional feeling was still 
further reflected in the views of some northern congress- 
men, of which Charles Sumner was a conspicuous ex- 
ample, who were in favor of denying voluntary bank- 
ruptcy to those whom they termed rebels.^ 

A compromise measure was agreed upon which passed 
both Houses and was signed by the Presi- a com- 
dent in 1867. Like its predecessor, it pro- promise 
vided for both voluntary and involuntary Pleasure, 
bankruptcy, but unlike its predecessor, it extended the 
involuntary provisions to all classes of bankrupts. 

1 Congressional Globe, 1867, Part 2, p. 169. 



296 MERCANTILE CREDIT 

. The District Courts of the United States were given 
jurisdiction in their respective districts in all matters 
pertaining to bankruptcy, and they were 
District required to be open at all times for the trans- 
the United ^^^i^n of business under this Act. These 
States Courts were given power to hold their sessions 

given ju- ^t any place in the district, after having given 
. ., . , adequate notice. This provision was intended 
of 1867. to correct defects in the two preceding laws, 
defects arising from the inconvenience of 
creditors and witnesses in attending sessions of the 
court. The Circuit Courts of the United States were 
given "a general superintendence and jurisdiction of all 
cases and questions arising under the Act; they were 
also given the power to hear cases as a court of equity 
upon petition or other regular process/' An amend- 
^ ment to the law in 1874 gave the Circuit Courts con- 
current jurisdiction with the district courts in all cases 
at law or equity brought against the assignee in bank- 
ruptcy, or by the latter against any person having an 
adverse interest with reference to the property or 
property rights of the bankrupt. 

ADMINISTRATION OF THE LAW 

It was made the duty of the judges of the District 
Courts to appoint in each congressional district, upon 
Duties of ^^ recommendation of the Chief Justice of 
District the Supreme Court, one or more registers in 
Courts and bankruptcy "to assist the judge of the District 
egis ers. q^^^,^ -^^ ^j^^ performance of his duties under 



BANKRUPTCY ACT OF 1867 297 

this Act/* The register was required "to receive the 
surrender of a bankrupt, to administer oaths in all pro- 
ceedings before him, to preside at meetings of creditors, 
to take proof of debts, to make all compilations of divi- 
dends, and all orders of distribution, and to furnish the 
assignee with a certified copy of such orders, and of the 
schedules of creditors and assets filed in each case." He 
was also required to audit and pass on the accounts of 
assignees, and to do such administrative business of the 
court as the district judge should direct. He was to keep 
memoranda of the proceedings coming before him and 
to forward to the clerk of the District Court a certified 
copy of these memoranda. The judge of the District 
Court could require the register to go any place within the 
district for the purpose of performing the various func- 
tions of his office. All cases in equity could be appealed 
from the District Courts to the Circuit Courts, but no 
cases could be appealed from the Circuit Courts to the 
Supreme Court unless the matter in dispute exceeded 
$2,000. This Act was amended in 1874 with reference 
to the latter provision, so that no case could be appealed 
from the Circuit to the Supreme Court unless the amount 
at issue exceeded $5,000. 

In the provisions stated above is found another attempt 
to bring the bankruptcy court within easy access of the 
people. The registers to be appointed were Attempt 
to be lawyers, and they were to have almost to make 
complete charge of cases in bankruptcy. As *^® courts 
one was to be appointed in each legislative ^^ ^^ 
district and as the register could be required people. 



298 MERCANTILE CREDIT 

to hold his court at any place within the district, 
the arguments against the former laws with reference 
to the expense and inconvenience in attending these 
courts could not be applied with equal force to the Bank- 
ruptcy Act of 1867. 

The law which first passed the Senate required the 
circuit judges to appoint the registers upon the recom- 
mendation of the Chief Justice of the Supreme 
Reasons Court. This provision was amended in the 
district House by placing the obligation to appoint reg- 
judges isters on the district judges. When the House 
should amendment returned to the Senate, it provoked 
registers. ^ great deal of discussion, which showed that 
partisanship had much to do in determining 
where the appointing power should be placed. In favor 
of the House Amendment it was claimed that since the 
district judges have charge of the cases in bankruptcy, 
and the registers work under them, the latter should 
be appointed by the former. It was claimed, moreover, 
that the district judges would know the members of the 
bar from which the appointments must be made, whereas 
the circuit judges could not in the nature of things know 
the lawyers, and the appointments would be dictated by 
politicians. It was thought that the office of Chief 
Justice of the Supreme Court would be degraded by 
making the Chief Justice responsible for partisan 
appointments. 

On the opposite side it was argued that the district 
judges were amenable to the circuit judges, and that the 
registers, who were subordinates of district judges, 



BANKRUPTCY ACT OF 1867 



299 



should be also under the authority of the Circuit Judge. 
It was claimed that as the Chief Justice of the Supreme 
Court is the head of the judicial system of 
the United States, the appointment of officers 
of the court by him would not degrade his 
office any more than the appointment of 
government employees by the President of the 
United States degrades the latter's office. A 
compromise was finally reached, which placed 
the appointment of the registers in the hands 
of the district judges upon the recommenda- 
tion of the Chief Justice of the United States. 



Reasons 
why 
circuit 
judges 
should 
appoint 
registers. 
Compro- 
mise 
adopted. 



Who 

might 

become 

voluntary 

bankrupts. 



VOLUNTARY BANKRUPTCY 

Any person owing debts to exceed $300 might apply 
for the benefits of this Act to the judge of the Judicial 
District in which the debtor resided for six 
months previous to filing the petition, by 
stating his place of residence, his inability to 
pay his debts, and his willingness to surrender 
all his property for the benefit of his creditors. 
The requirement that the debtor must owe $300 before 
he could go into bankruptcy was intended to prevent 
those who owed small amounts incurred chiefly by living 
beyond their means, from cancelling their debts. The 
debtor was required "to annex to his petition a schedule 
verified by oath before the Court" or before an agent of 
the court giving a full statement of all his debts, the names 
of his creditors, there places of residence, the nature of 
each debt, and the manner by which it was incurred. 



300 MERCANTILE CREDIT 

He was required to give also a statement of any existing 
mortgage or pledge given for payment in case there was 
either of such in existence. The filing of this petition 
was considered an act of bankruptcy, provided that the 
applicant took an oath of allegiance to the United States 
and that the court was convinced that the debtor owed 
debts in excess of $300.^ The judge was required to 
order such notices published in the newspapers as the 
warrant prescribed. He was required also to cause a 
written or printed notice to be sent by mail or by 
messenger to the creditors to the effect: (1) ''That a 
warrant in bankruptcy has been issued against the estate 
of the debtor; (2) that the payment of any debts or the 
delivery of property to the debtor or the transfer of any 
property is forbidden; (3) that a meeting of the creditors 
of the debtor will be held to prove their debts at a court 
of bankruptcy, to be held at a specified time not less than 
ten nor more than ninety days after the issuing of the 
warrant." 

The creditors were required to elect, at their first 
meeting, one or more assignees of the debtor^s estate. 

The choice was to be made "by the greater 
qj part in value and in number of the creditors 

assignees, who have proved their debts. "^ If the as- 
Property signees were not chosen at this meeting the 
baitoi t register might appoint them if there was no 

opposition, and the district judge might ap- 

* This clause was for the benefit of those who shortly before had 
participated in the secession movement. 
» Section 12, The Bankruptcy Act of 1867. 



BANKRUPTCY ACT OF 1867 301 

point if he chose to do so; but he must appoint the as- 
signees if there was opposition to their appointment by 
the register. The approval of the judge was necessary 
to the election or to the appointment of an assignee. As 
soon as the assignee was appointed "the judge shall (or 
where there is no opposing interest the register may) con- 
vey to the assignee all the property and property rights 
of the bankrupt with the following exceptions:" (1) The 
necessary household and kitchen furniture, and such 
other necessities of the bankrupt as the assignee might 
designate taking into account the circumstances of the 
family, but the whole amount was not to exceed $500. 
(2) "The wearing apparel of the bankrupt, and that of 
his wife and children."^ (3) "The uniform, arms, and 
equipment of any person who is or has been a soldier 
in the militia or in the service of the United States.'' 
(4) Such property as was exempted from seizure, 
attachment or "levy on execution by the laws of the 
United States.'* (5) Other property not included in the 
foregoing exceptions, which was exempted from levy 
in the payment of debts by the state where the bankrupt 
resides, "to an amount not exceeding that allowed by 
such state exemption laws in force in 1864." 

The assignee was given power to dispose of the prop- 
erty of the bankrupt to the best interest of the creditors. 
An account of all money received by him as 

assignee was to be kept, which account any ^/®^ ^ 
'=' ^ ^ ^ *' assignees* 

creditor might examine at any reasonable 
time. He was also given the same rights to collect 
1 Section 14, The Bankruptcy Act of 1867. 



302 MERCANTILE CREDIT 

debts owed the estate of the bankrupt as the 
debtor would have in the absence of bankruptcy pro- 
ceedings. 

The court might require its bankrupt to submit to an 
examination under oath regarding all matters pertaining 

to his property, its condition, his accounts. 
An p-T flTn - 

ination of ^^^' '^^^ court might also require the at- 
the bank- tendance of any other person for a similar 
rupt and investigation. The wife of the bankrupt 

might also be required to attend court to be 
examined as a witness and if she refused, the bankrupt's 
discharge was to be denied unless the latter proved to the 
satisfaction of the court that "he was unable to procure 
the attendance of his wife." 

The following debts were entitled to priority, each to 
be paid in full in the following order: (l) The costs of 

closing up the estate; (2) debts owed the 
Debts en- Uj^|;g(j States including all taxes and assess- 
priority. ments; (3) debts owed the state and taxes 

and assessments under the laws of the state; 
(4) wages due an operator, clerk or house servant not 
to exceed $50 for labor performed within six months of 
the time of the first publication of proceedings in 
bankruptcy; (5) all debts due any one who by the laws 
of the United States is entitled to preference. 



DISCHARGE 

Any time between six months and a year after the 
/ adjudication in bankruptcy the debtor may apply for a 



BANKRUPTCY ACT OF 1867 303 

discharge from his debts. The court is then required 

to give notice by mail to all creditors and to publish a 

notice once a week in newspapers having a 

general circulation in the district, calling a f P'®" 

vents a 
meeting of creditors to show why the debtor discharge. 

shall not be discharged. Here follows a long 
list of things which will prevent a bankrupt from secur- 
ing a discharge, of which the chief ones are: (1) Swear- 
ing falsely regarding any matter pertaining to his estate; 
(2) concealing a portion of his estate or any of his records 
or falsifying his records; (3) giving a preference within 
four months previous to the beginning of proceedings in 
bankruptcy or making a fraudulent assignment of his 
property; (4) losing a part of his property in gambling; 
(5) admitting a false or fictitious debt against his estate, 
or failing to disclose the fact that such a debt had been 
proved; (6) failing as a "merchant or tradesman" to 
keep proper books of account. 

No person discharged under this Act can be discharged 
a second time on his own petition if his assets do not 
pay 70 per cent, of his debts, unless three- 
fourths in value of his creditors who have ^ions de- 
proved their claims give their consent in termining 
writing to his discharge. Any bankrupt, * second 
however, who has proved to the satisfaction 
of the court that he paid all his debts at the time of 
his previous bankruptcy or who has been released vol- 
untarily by his creditors, may be discharged under the 
same conditions as if he had not been a bankrupt 
previously. 



304 MERCANTILE CREDIT 

An amendment was before the Senate requiring as a 
condition necessary to a discharge that the assets of a 
bankrupt should pay 50 per cent, of his debts, or else 
that a majority of his creditors should vote for his dis- 
charge. This amendment was opposed on the ground 
that its acceptance would defeat the Bill. The interests 
of those who desired a discharge from debt were so 
strongly represented in Congress, that its defeat was in- 
evitable. At this time a requirement that 50 per cent, 
of the debts should be paid would exclude from the priv- 
ileges of discharge all but very exceptional bankrupts. 

INVOLUNTARY BANKRUPTCY 

A person might be made an involuntary bankrupt for 

any one of the following reasons: (1) Absenting himself 

„„ from the state or territory where he lives or 

who may 

be made concealing himself to defraud his creditors; 

an in- (2) concealing or removing his property, 

voluntary giving away or disposing of it, to defraud or 
delay action on the part of his creditors; (3) 
while insolvent or in contemplation of insolvency dis- 
posing of or transferring his property with intent to 
prefer creditors or otherwise to defeat the operations of 
the law; (4). committting an act of bankruptcy and 
being adjudged a bankrupt on petition of one or more 
creditors whose total debts amounted to at least $250, 
provided the petition was filed within six months of the 
act of bankruptcy. 

When a petition was filed to make a debtor a bankrupt, 
if the evidence was sufficient the court might order the 



BANKRUPTCY ACT OF 1867 305 

debtor to appear before it to show why he should not 
be made a bankrupt. If the petitioners could not 
establish their charges the debtor was to be ^ petition 
dismissed, and he had the right to collect to make a 
damages. If the charges preferred in the debtor a 
petition were found to be true, the court ^^ "^ * 
should adjudge the debtor a bankrupt and was required 
immediately to issue a warrant for the taking possession 
of his property. The property should be taken, dis- 
posed of, and distributed in the same manner as if the 
debtor became a bankrupt on his own petition. 

At a meeting of the creditors, three-fourths in value of 
the creditors whose claims had been proved might decide 
what action should be taken in the interests of control of 
the creditors with reference to the estate of the debtor's 
debtor. They might decide that the estate estate by 
should be settled and divided among the cred- 
itors by trustees, under the direction of a committee of 
the creditors, the creditors to have the right to nominate 
one or more trustees to close the estate. However, the 
sanction of the court when it deemed that the interests 
of the creditors would be promoted by this action, was 
necessary. When three-fourths in value of the creditors 
whose claims had been proved filed their consent that 
the estate of the bankrupt be wound up and settled 
by the trustees, it became the duty of the bankrupt or 
his assignee to transfer the estate to the trustees, the 
latter having the same power in holding and disposing 
of the property as the assignee would have had if the 
resolution of the trustees had not been passed. 



306 MERCANTILE CREDIT 

The bankrupt in involuntary proceedings had the same 
right to petition for a discharge in bankruptcy and was 
entitled to the same treatment as if he became a bankrupt 
on his own initiative. 

All the fraudulent acts which made a debtor an 

Punish- involuntary bankrupt made him guilty of a 

mentfor misdemeanor, and upon proof of this in any 

amis- court of the United States he might be 

demeanor. . . ■, ^ , xt_ xt_ 

imprisoned for not more than three years. 

At the outset the law was acceptable to both debtors 
and creditors. It had been carefully drawn after the 
best models. The chief models used in 
Modeled framing the laws were the Insolvency Law of 
after the Massachusetts and the Bankruptcy Act of 
Massa- England. Unforeseen defects appeared in 
chusetts practice, and it proved much more unsatis- 
and the factory than either of the former laws. An 
Bankrupt English Act of 1831 established a system of 
Act. officials to handle the cases of bankrupts, and 

this law was not repealed until 1869. This 
Act provided for a court of review, composed of a chief 
judge and three junior judges, to take charge of bankrupt 
cases. Thirty official assignees were appointed to act 
with creditor assignees. The machinery for closing 
estates was cumbrous, slow, and expensive, and proved 
very unsatisfactory. 

The American Act of 1867 proved even more unsatis- 
factory than the Enghsh law. The methods of closing 
estates were slow and expensive, and the courts were not 
^ held at places where they were easy of access by the 



BANKRUPTCY ACT OF 1867 307 

people. The law would have been repealed long before 
1878 if it had not been for the disturbed industrial con- 
ditions of the United States. The compensa- 
tion of all officers and attaches of the court , ® ®^ ° 
was in fees, and the earnings of each oincer i867. 
were not in proportion to his services. The 
failure to limit definitely the work of each official for which 
fees might be received made the costs of closing an estate 
subject to the desires of the officers who had it in charge. 
The answer of an English candidate for admission to the 
bar to the question ''What is the province of the courts 
in bankruptcy?'' seemed to state quite accurately the 
conditions under which the Bankruptcy Act of 1867 
operated, viz., ''To see the estate of the bankrupt 
equally divided between the officers of the court and the 
attorneys engaged in the cause.'' 

The law presupposed the appointment of high grade 
lawyers as registers. Instead of these, broken down 
politicians and men who were failures in the d^ss of 
practice of the law were frequently appointed, registers 
Although the duties of the registers were appo^iited. 
limited and their powers were restricted, means were 
devised to extend these powers and increase their fees. 

In case this was done a voluntary petitioner would bring 
his schedule to the register, the latter would induce him 
to change it under the assumption that it was Methods 
not made out properly for which he would re- employed 
ceive a fee; he received another fee also for *° make 
giving an oath. In proving his claims the ^^ estates 
creditor would be induced to change his affi- expensive. 



308 MERCANTILE CREDIT 

davit for which the register would receive fees. When 
the creditor could not attend a meeting of creditors, 
he had to give a power of attorney, for which the 
register received another fee. In taking proofs the 
register found other ways of securing fees. When 
proofs were objected to, the objection had to be put 
in writing; a time and place were assigned for hearing 
cases, and another opportunity was presented to the 
register to increase his income. The register and as- 
signee frequently worked together, and the former was 
in a position to help the latter to secure an income much 
above what the law assumed he would receive. The 
marshal and clerk of the court were also permitted to 
receive exorbitant fees for the labor they performed. 
The system of the court officials to secure the bulk 
of the bankrupt estate was such that in a few years 
most creditors decided to settle their claims out of 
court. 

An amendment was passed in 1870 which provided 
that any one "who stopped or suspended and had not 
.pj^g resumed the payment of commercial paper 

amend- within a period of fourteen days" could be 
ment of proceeded against as a bankrupt. With the 
panic of 1873 many influential creditors saw 
that they might become debtors at any time, and that 
under the above amendment they could be proceeded 
against for the suspension of the payment of commercial 
paper. Their influence was at once exerted to modify 
the involuntary provisions of the bankruptcy law. In 
his message to Congress in 1873, President Grant pointed 



BANKRUPTCY ACT OF 1867 309 

out some of the weak points in the law that would make 
themselves felt in a period of commercial depression, 
and recommended either the entire repeal of the law or 
else the repeal of the involuntary provisions. He claimed 
that the involuntary provisions continued to embarrass 
the country; that in times of monetary stringency even 
prudent business men were made bankrupts although 
their assets might exceed their liabilities; and that this 
country had gotten into such a nervous state that the 
filing of a petition by an unfriendly creditor often ruined 
responsible business men. 

The important changes introduced in the bankruptcy 
law of 1867 by the amendments of 1874 had to do with 
changes in the involuntary features, and the provision 
for settlement out of court. 

The Act of 1867 as amended in 1870 made the sus- 
pension of payment of commercial paper for fourteen 
days by a banker, merchant or trader a reason 
for action in involuntary bankruptcy. An Amend- 
amendment of 1874 made the fraudulent i874. 
stopping of payment or the suspension of 
payment in the ordinary course of business for forty days 
a cause for action in involuntary bankruptcy. 

Under the Act of 1867 a debtor could be adjudged a 
bankrupt upon petition of one or more creditors if their 
debts aggregated $250. This clause was amended in 
1874 so as to require the petition to make a debtor a 
bankrupt to come from at least one-fourth of the cred- 
itors whose debts amounted to at least one-third of the 
provable debts of the bankrupt. In all cases where 



310 



MERCANTILE CREDIT 



The 

Amend- ; 
ment of 
1874 

weakened 
the in- 
voluntary 
law. 



action was initiated by petitioners not in conformity 
with this amendment, the cases were to be dismissed at 
the expense of the petitioners. 

This amendment practically repealed the involuntary 
provisions of the law. The risk to the creditors in all 
but very exceptional cases was entirely too 
great for them to take action to throw a debtor 
into bankruptcy. It was claimed that no one 
could be made an involuntary bankrupt ex- 
cept by his own consent. An involuntary 
bankrupt received his discharge more easily 
than one who sought voluntarily for the bene- 
fits of the law. By a perverse ingenuity the 
law was so constructed that it was to the interest of 
the debtor to be made an involuntary bankrupt, al- 
though the creditor preferred that the debtor go into 
bankruptcy voluntarily. 

The suggestion for the other important change in the 
law of 1867 came from the English law of 1869 providing 
for settlements outside of court. This pro- 
vision enabled the debtor to offer terms of 
composition which, if accepted by a majority 
in number representing three-fourths in value 
of the creditors at a meeting called by the 
court, and if confirmed by the signatures of 
the debtor and two-thirds in number and one- 
half in value of the creditors, became binding. 
The debtor or a representative of him was 
required to be present at this meeting and "produce a 
statement showing the whole value of his assets and debts 



A second 
amend- 
ment of 
1874 
enabled 
estates to 
be settled 
out of 
court. 



BANKRUPTCY ACT OF 1867 311 

and the names and addresses of the creditors to whom 
such debts respectively are due." 

Since the law of 1867 and the preceding laws were 
modeled to a certain extent after the English laws, it was 
quite natural for us to go to the English 
amendments of 1869 for suggestions when an method of 
amendment of the law of 1867 was contem- settling 
plated. The English law of 1869 permitted estates 
the debtor to petition for the liquidation of his ^ 
affairs by arrangement, or by offering directly 
to his creditors terms of composition. The latter method 
is simpler and less expensive than the one described in the 
preceding paragraph. The debtor offers to settle at so 
much on the dollar, and if his offer is accepted by his 
creditors, he is discharged. This law left matters to too 
great an extent in the hands of debtors in that they were 
permitted to pursue the practice of going among creditors 
to obtain proxies before a meeting was called and before 
concerted action could be taken. No definite control 
was exercised over the debtor's statement of his assets 
and his liabilities, and consequently this route to settle- 
ment became the recourse of the dishonest. Settlement 
by composition in England became a failure. 

In the United States a difference of opinion prevailed 
as to the value of settlements by composition. Settle- 
ments were made at much less expense than that re- 
quired by going through bankruptcy, and the extraor- 
dinary abuses reached in England in settlements by 
composition did not prevail here. However, the law in 
the United States did not protect creditors by adequate 



312 MERCANTILE CREDIT 

safeguards against fraudulent debtors by requiring a 
careful examination of their books and a thorough ex- 
amination of their affairs before accepting their terms 
of composition. 

The amendments of 1874, instead of improving the 
law, had only made matters worse. At the session of 
Congress in which the amendments were 
Elements passed the House was in favor of a repeal of 
weakness *^^ bankrupt law. In 1876 the sentiment 
in the within the House was so overwhelmingly 

amend- against the law that the House voted to repeal 
^Q,j^ it without debate. A memorial requesting its 

repeal gives us some clue to the arguments 
which influenced the members. It was claimed that 
fraudulent preferences were not prevented by the law, 
that large debts were often incurred with the expecta- 
tion of compromise, that the closing of estates was un- 
reasonably prolonged, and that the expenses of settling 
estates discouraged bankruptcy proceedings altogether. 

A bill providing for the repeal of the law was intro- 
duced by Senator MacCreery of Kentucky, October. 17, 
A bill to 1877. It was submitted to the Judiciary 
repeal the Committee, which reported favorably for 
law. repeal April 10, 1878. In introducing the 

bill Senator MacCreery said that *'the only ones who 
will regret the repeal are those who have fattened on 
the fees and those getting ready for its advantages.'' 

The legislators at this time were divided into three 
camps: 1. Those who wanted the law amended; 2. 
those who wanted immediate and unconditional repeal; 



BANKRUPTCY ACT OF 1867 313 

3. those who desired the repeal of the law but who wished 

a delay of the repeal of the voluntary provisions until 

January 1, 1879. The extremes to which we 

had gone in bankruptcy may be seen from the ^*^®'s® 
-. , . r i. . views of 

fact that every one was m favor of an imme-^ members 

diate repeal of the involuntary portion of the of 

law. When the repeal of the law of 1841 Congress 

was up for consideration, the voluntary pro- niptcy. 

visions of that law were aimed at chiefly as 

they were considered unconstitutional and dangerous 

to industrial stability. 

Senator Matthews of Ohio introduced an amendment 
repealing the law of 1867 but substituting a simple law 
abolishing involuntary bankruptcy and mak- ^^ ^^^ ^^ 
ing possible a discharge in voluntary bank- repeal the 
ruptcy when the assets paid 50 per cent, of the Involun- 
debts. It was provided that a discharge 
should not be extended to what had been acquired fraud- 
ulently or to obligations that had been incurred by means 
of a breach of trust. After much discussion this amend- 
ment was rejected. It was claimed that the amendment 
should go back to the Judicial Committee, a process 
which would delay action, and Congress was in no mood 
to postpone the time for the repeal of the law. 

Much difference of opinion prevailed on the postpone- 
ment of the time when the repeal of the voluntary pro- 
visions of the law should take effect. Those Time at 
favoring postponement felt that some time ^^^^ *^® 
should be given for the adjustment of affairs ^i^q^i^ go 
to the new conditions, and some time for those into effect. 



314 MERCANTILE CREDIT 

contemplating bankruptcy to begin action. Those 

opposed to postponement contended that delay would 

cause a demoralization in business by the great rush of 

prospective bankrupts to the bankruptcy courts. 

Some of the prominent members of the Senate believed 

that a national bankruptcy act would be superior to 

the insolvency laws of the various states, 

repealed ^^^ although they admitted that the law of 

to take 1867 was a failure, they hoped that it might 

effect at i^q amended so as to meet the approval of 

^ members of Congress. The difficulties in the 

of cases in way of preparing a satisfactory law to satisfy 

process of the industrial conditions in the various states 

^® f " were pointed out. It was contended that the 
ment. 

framing of a satisfactory law for England was 

a difficult thing. This was to be seen in the fact that 
although she was a commercial nation and did not en- 
joy the variety of industrial interests possessed by the 
United States she made frequent changes of the bank- 
ruptcy law. By a large majority in both Houses, the 
> bill was finally repealed to take effect at once, with the 
exception that cases in process of settlement were not to 
be affected by the repeal. 

In the eleven years the law was in force over 100,000 

bankrupt cases were considered. The distribution of 

j these cases shows that commercial interests in any sec- 

/ tion of the country determine the importance of the law 

'\ to it. One district of Florida had in all these years but 

one case, whereas Massachusetts alone had 9,000 cases. 

The law proved a failure because of the costs of settle- 



BANKRUPTCY ACT OF 1867 315 

ments, delays in closing up affairs, the inaccessibility of 
the courts, and the failure of the involuntary provision 
by the Amendment of 1874. The law died 
of these diseases, says a critic: ''fees, obstruc- , ^ 

l&W WAS CI 

tions to involuntary proceedings, and com- failure, 
positions." Opinions differ with reference to 
compositions, but all were agreed that costs in settling 
estates and the shortcomings of the involuntary provi- 
sions were important factors in defeating the law. 

If the officials of the court had been paid salaries in- 
stead of fees and if penalties had been imposed when 
estates were not settled within a given period, the law 
would have been greatly improved. It was made too 
easy to go into bankruptcy and too difficult to force an 
unwilling debtor into bankruptcy and bring about a 
proper disposing of his estate. The United States courts 
were too inaccessible, and lawyers and others did not seem 
to be familiar with the workings of the law. It is always 
easier to repeal a bad measure than to correct its defects, 
and therefore the easiest policy was pursued by Congress. 



CHAPTER XIX 
BANKRUPTCY ACT OF 1898 

The law of 1867 would have been repealed before 1878 

if it were not for the fact that a large class of business 

men believed that the class of interests they 
Conven- 
tions to represented would be best served by a national 

formulate bankrupt law. They consequently hoped 
a bank- ^^^^^ ^^le law of 1867 might be amended in 
such a way as to eliminate its worst features. 
Shortly after it was repealed a campaign was started by 
them for the purpose of enacting a national law, which 
they hoped would be permanent. National conventions 
were held in Washington in 1881 and 1884, in St. Louis in 
the spring of 1889, and in Minneapolis in the fall of 1889. 
Believing that the fundamental weakness of the law of 
1867 consisted in its administrative features, that is, in 
the unnecessary delays and in the great costs in closing 
up estates, and in the inaccessibility of the federal courts, 
they at once proceeded to frame a law in which these 
defects would be eliminated. Representing commercial 
and business interests they were naturally concerned 
chiefly in raising the plane of credit and consequently in 
having a strong involuntary law. The first two conven- 
tions approved a Bill framed by Judge Lawell of Massa- 
chusetts. It was believed to be too severe on debtors, 
however, and finally at the Minneapolis convention the 

316 



BANKRUPTCY ACT OF 1898 317 

so-called Torry Bankrupt bill, containing less drastic fea- 
tures than the Lowell, was approved. 

In accepting this measure the convention had in mind 
(1) the rights of the creditors, to the extent of giving 
Purposes ^^^^ ample protection against the dishonest 
of the debtors, and preventing the latter from being 

proposed discharged; (2) the rights of the debtor to the 
measure, extent of giving liberal remedies in voluntary 
bankruptcy and protecting the honest from persecution; 
(3) the need for a law that would be in every respect 
national in its scope, inexpensive, and as simple as possible 
in its operation. 

The measure proposed by the Minneapolis convention 
was amended frequently. It passed the House in the 
Fifty-first Congress, was defeated there in the 
Fifty-third Congress, and was passed again in Efforts to 
the Fifty-fourth Congress. A voluntary bank- P?,f *^® 

Bill 

ruptcy measure mtroduced by congressman proposed 
Bailey of Texas, passed the House in the by the 
Fifty-third Congress but was not submitted ^^smess 
to a vote in the Senate. In the first session of conven- 
the Fifty-fifth Congress practically the same tion. 
measure passed the House by a majority of 76. 
In the second session of this Congress the measure which 
passed the House, and which became with the amend- 
ments of the Senate the National Bankrupt Act of 1898, 
was introduced by Congressman Henderson, and was 
the original Torry Bill with amendments. 

The author in speaking for the measure claimed that 
it would accomplish the following objects: *'(1) Treat 



u 



318 MERCANTILE CREDIT 

the honest bankrupt with consideration and in a reason- 
able time discharge him; (2) punish in a human way 

dishonest bankrupts; (3) reduce the estate of 
What it was ^ ^ / 

claimed ^ bankrupt to cash quickly and give it to the 
that the creditors; (4) give creditors a hearing at each 

measure stage of the proceedings; (5) substitute in- 
would ac- . • r • tj.' 

J. , expensive compromises for expensive litiga- 

'"''"'^ ^ * tion." 

Under this law all debtors except corporations could 
petition to become voluntary bankrupts. Each peti- 
tioner in voluntary bankruptcy was required 
Vo untary ^^ gj^ ^ schedule of his property under oath, 
ruptcy. giving in detail a list of creditors, the amounts 
due each, and the security held by them. He 
was required to surrender all his property aside from what 
the exemption laws of his state permitted him to keep, 
while his creditors were to take control of his property 
and to distribute the dividends. Judges or referees could 
make adjudications or dismiss petitions. Fraudulent 
conveyances could be recovered, and if the bankrupt 
committed an offense punishable by this Act he could 
be tried in another court for a criminal offense. The 
estates of voluntary and involuntary bankrupts were to 
be administered in precisely the same way, and the rights 
of the two classes of bankrupts were identical. 

All debtors except farmers, wage earners, and national 
banking institutions owing debts in excess of $1,000 
Involun- could be made involuntary bankrupts. The 
tary bank- petition must allege one or more acts of bank- 
ruptcy, ruptcy, which include insolvency, inability 



BANKRUPTCY ACT OF 1898 319 

or unwillingness to pay debts or to keep property from 
getting away by preferences.^ The title of the trustee 
begins with the date of adjudication but the condition 
of the property relates back to the time of filing the 
petition and the bankrupt is in precisely the same 
position as any defendant in law or equity proceed- 
ings. 

A petition to make a man a bankrupt may be filed 
within four months after the commission of an act of bank- 
ruptcy. ^'Such time shall not expire until ^ . . 
- , r 11 r ^ 1- Petitions 

four months after the date of the recordmg or jj^ invol- 

registering of the transfer or assignment when untary 
the act consists in the debtor's having made a ^^°^" 
transfer of any of his property with intent to 
hinder, delay or defraud his creditors; or for the purpose 
of giving a preference as hereinbefore provided, or a 
general assignment for the benefit of his creditors, if 
by law such recording or registering is required or per- 
mitted, or, if it is not, from the date then the beneficiary 
takes notorious, exclusive, or continuous possession of the 

* "Acts of bankruptcy by a person shall consist of his having 
(1) conveyed, transferred, concealed, or removed, or permitted to 
be concealed or removed, any part of his property with intent to 
hinder, delay, or defraud his creditors, or any of them, or (2) trans- 
ferred, while insolvent, any portion of his property to one or more 
of his creditors with intent to prefer such creditors over his other 
creditors; or (3) suffered or permitted, while insolvent, any cred- 
itor to obtain a preference through legal proceedings, and not 
having at least five days before a sale or disposition of any property 
affected by such preference vacated or discharged such preference." 
Five acts of bankruptcy were enumerated by the law, two of which 
were voluntary acts of bankruptcy. 



320 MERCANTILE CREDIT 

property unless the petitioning creditors have received 
actual notice of such transfer or assignment/' ^ A settle- 
ment may be made between debtors and creditors after 
the debtor has been examined in open court or at a 
meeting of his creditors. 

A bankrupt must petition for a discharge not sooner 
than one month or later than one year after adjudication. 
. In exceptional instances the time of filing the 

in invol- petition may be extended six months. He 
untary must be discharged unless he has been found 

bank- guilty of dishonesty or fraud with reference 

to his property. The confirmation of a com- 
position discharges the bankrupt from all debts except 
those which were agreed to be paid by the terms of the 
composition. 

The Nelson Bill, primarily a voluntary measure, passed 

the Senate, and the matter of bankruptcy was submitted 

to a joint committee of both House and Senate. 

The Dill ipj^g measure adopted was known as the 

which 

passed Henderson Bill because the law which finally 

was a passed was, from an administrative or pro- 

com-^ cedure point of view, the House measure. 

«,oae«^^ However, it will be seen that this measure was 
in principle more nearly the Senate Bill than 
the House measure. The two measures differed chiefly on 
(1) grounds of involuntary bankruptcy, (2) offenses for 
which a bankrupt could be imprisoned, and (3) restric- 
tions to be placed on a discharge. 

1 United States Bankruptcy Law of 1898, Ch. 3. 



BANKRUPTCY ACT OF 1898 321 

The House Bill^ stipulated nine grounds for denying 
a bankrupt a discharge. These were reduced by the 
conference committee to two : (1) Committing Grounds 
an offense punishable by indictment; and (2) for 
keeping fraudulent books. The four grounds denying a 
on which a bankrupt could be imprisoned in ^ 
accordance with the provisions of the House Bill were 
changed to two by the conference committee: (1) 
concealing property from the trustee; and (2) committing 
perjury by making a false statement. 

The law which passed both Houses of Congress and 
was signed by the President, July 1, 1898 defines courts 
of bankruptcy as follows : the District Courts 
of the United States in the several states, the ij^nk- 
Supreme Court of the District of Columbia, ruptcy 
the district courts of the several territories, provided 
and the United States Courts in the terri- jLo^ 
tories. The courts have the power to try 
and to punish bankrupts or to discharge them, "to 
confirm or reject compositions between debtors and 
creditors,'^ to appoint receivers or marshals to take charge 
of the property of bankrupts upon appHcation of those 
interested, and to authorize them or trustees to manage 
the property for limited periods in the best interests 
of the estate, and "to cause the estates of bankrupts 
to be collected, reduced to money, distributed, etc.'' 

Any one of five acts makes a man a bankrupt: (1) 
Concealing or removing his property with intent to 

1 Congressional Record, Vol. 31, Part 7, p. 6296, Fifty-fifth Con- 
second session. 



322 MERCANTILE CREDIT 

defraud his creditors; (2) While insolvent transferring 
his property with intent to prefer creditors; (3) While 
Acts which i^isolvent permitting a creditor to obtain a 
made a preference through legal proceedings without 
debtor a having discharged such preference at least 
^ * five days before a final disposition of any 
property affected; (4) Making a general assignment for 
the benefit of his creditors; (5) "Admitting in writing 
his inability to pay his debts and his willingness to 
be adjudged a bankrupt on that ground."^ 

Only the first three of the five acts come under the 
head of involuntary bankruptcy. Under this act a per- 
son is not considered insolvent if the aggre- 

gate of his property, exclusive of that which 
may a 
debtor be ^^^ been concealed or conveyed with fraudu- 

made an lent intent, is sufficient in amount to pay his 

involun- ^eb^s. A fraudulent act of itself does not 
tarv 

bankrupt ^^^^ ^ ^^^ ^ bankrupt. Even when dis- 
honesty is estabHshed, if the alleged bankrupt 
proves his solvency under the above conditions the case 
must be dismissed, and the costs, including the fees of 
the attorney of the defendant, must be borne by those 
who bring the suit. To insure the payment of expenses, 
the petitioner must file a bond sufficient to cover 
costs. 

Any one except a corporation may become a voluntary 
bankrupt, and any one except a wage earner and a farmer 
may be forced into bankruptcy. State or national 
banks cannot be adjudged bankrupts. 

^ See Amendments to the Act of 1898. 



BANKRUPTCY ACT OF 1898 323 

The bankrupt is required to attend the first meeting 
of his creditors, and he must "submit to an examination 
concerning the conduct of his business, the ^^hat a 
cause of his bankruptcy, the amount, kind, bankrupt 
and whereabouts of his property, and all is required 
matters which may affect the settlement of ** *^ 
his estate. "1 He is also required to obey all other law- 
ful orders of the court, examine the correctness of all 
claims filed against his estate, and notify his trustee as 
soon as he learns of any attempt of creditors to evade 
the provisions of the Act. 

A bankrupt may offer terms of composition to his 

creditors, after he has been examined in open court, at a 

meeting of his creditors, and after he files a 

schedule of his property and a list of his cred- ™v"®g®s 

of & 
itors, which the law requires. The bankrupt bankrupt. 

may apply for the confirmation of a composi- 
tion when this application has been accepted in writing 
by a majority of his creditors representing a majority 
of accounts against him. The court is required to con- 
firm a composition when it feels that it is to the best 
interests of the creditors, and it is satisfied that the bank- 
rupt is not guilty of an act which would prevent his dis- 
charge. After one month and within twelve months 
after being adjudged a bankrupt, a person may apply to 
the court for a discharge. When the court has given all 
opposed to the discharge a reasonable opportunity to 
testify, it must discharge the applicant if it is satisfied 
that he has not committed an offense punishable with 
1 United States Bankruptcy Law, 1898, Ch. 3, Section 7. 



324 MERCANTILE CREDIT 

imprisonment or concealed his financial condition with 
fraudulent intent and, "in contemplation of bankruptcy, 
destroyed, concealed, or failed to keep books from which 
his true condition might be ascertained." 

The bankruptcy law does not modify in the least the 
exemption laws of the states. 

Courts of bankruptcy are required to appoint a suffi- 
cient number of referees so that each county may "con- 

„ , stitute at least one district" when the ser- 

Each 

county an vices of a referee are needed. In the absence 

adminis- of a judge of bankruptcy, referees have all the 
trative powers of judges except the right to pass on 

the application of bankrupts for composi- 
tions and discharges. 

The creditors of a bankrupt estate at their first meet- 
ing may appoint one or three trustees to manage the 

_ ^ estate. When the creditors do not appoint a 

Trustees: . . i i mi 

their trustee, the court is required to do so. The 

duties and trustees may be either individuals competent 
compen- ^^ ^^^ ^g trustees, or corporations which are 
permitted either by their charters or by law 
to act in this capacity. The chief duties of the trustees 
are to control the estates in question, reduce the prop- 
erty to money, keep full accounts, and set apart the bank- 
N ^1 o> rupt's exemptions, dividends, etc. Trustees^ may be 
allowed by courts "not to exceed 3 per cent, on the first 
$5,000 or less, 2 per cent, on the second $5,000 or part 
v> b thereof, and 1 per cent, on such sums in excess of $10,000."^ 

^ Changed by the Amendment of 1903. 

2 United States Bankruptcy Law, 1908, Ch. 5, Section 48. 



BANKRUPTCY ACT OF 1898 325 

An important provision of the law is the prevention 
of preferences. Under this Act a debtor shall be deemed 
to have given a preference if, while insolvent, 
he has permitted or given a judgment against P'"®^®'"" 
himself to some creditor, or transferred prop- vented, 
erty to the latter, the effect of which will be 
to enable some creditor or creditors to receive a larger 
percentage of his debt than other creditors. If a debtor 
gives a preference within four months before the filing 
of a petition, or after the filing of the petition and be- 
fore he is adjudged a bankrupt, and the person receiving 
it has reason to believe that it was intended as a prefer- 
ence, the trustee will have power to collect the value of 
the property from the one so preferred. 

All taxes or debts "owing by the bankrupt to the 
United States, state, county, district or municipality" 
must be paid out from the proceeds of the Debts 
estate before any dividends are paid to cred- which 
itors. The debts which have a preferred have 
claim to the assets of a bankrupt have priority Pnonty. 
in the following order: (1) The cost of preserving the 
estate after the filing of the petition; (2) "the filing fees 
paid by creditors in involuntary cases; (3) the cost of 
the administration of the estate, including reasonable 
fees to an attorney for the bankrupt in both involuntary 
and voluntary cases; (4) wages due workmen, not to 
exceed $300 for each person, which were earned within 
three months prior to the commencement of proceedings; 
(5) debts owing to any person which by the laws of the 
states or the United States are entitled to priority." 



r 



326 MERCANTILE CREDIT 

The Torry Bankruptcy Bill was first introduced in 
Congress in 1890 and was presented to each succeeding 

congress until the law of 1898 was passed, 
trasted '^^^ same set of circumstances which were 
interests responsible for former bankruptcy laws de- 
of debtors termined this law. The United States had 
creditors ^^^^ through a period of industrial depression 

from 1893 to 1898, and hundreds of business 
concerns which had heretofore been prosperous were now 
bankrupts. As insolvents desire a law which will dis- 
charge them from their debts, a very different demand was 
made for the passage of a bankrupt law near the closing 
years of the panic than when the Torry Bill was first 
introduced in 1890. Debtors are naturally in favor of 
a voluntary bankrupt law, which will enable those who 
cannot pay their debts to go into bankruptcy and get a 
discharge from their obligations. The creditors, upon 
the other hand, are primarily interested in an involuntary 
law, since through it credit may be maintained on a high 
plane; they are interested in a voluntary law only to 
the extent that they desire the burdens lifted from the 
shoulders of honest debtors. The Torry Bill, since it 
was constructed by business interests for the purpose of 
elevating the plane of commercial credit, was supported 
mainly by commercial bodies in all sections of the 
country. The Bill which finally passed was the result 
of a struggle between the friends of the voluntary bank- 
ruptcy law and those of the involuntary and was conse- 
quently a compromise measure. 

The chief opponents of the Torry Bill were the fol- 



I 



BANKRUPTCY ACT OF 1898 327 

lowing: (1) The older business men who had had experi- 
ence with the bankruptcy law of 1867, and as a result 
of that experience were convinced of the im- chief 
practicability of any national law; (2) the opponents 
larger business houses, which on account of ^^ *^® 
their organization are in favor of the granting °"^ 
of preferences. (They have credit agents in all sections 
of the country who have an accurate knowledge of the 
financial status of the customers of the House. They 
know how much credit to give and the conditions under 
which credit should be granted. It is doubtful if such 
business concerns could be aided by a National Bank- 
rupt Act which rigidly forbids preferences.) (3) the 
bankrupts and those primarily interested in having 
bankrupts discharged. 

From 1879 to 1906 there were 171,389 failures, repre-*^ 
senting liabiUties of nearly three billion dollars. In the 
debates in Congress the condition of these unfortunates 
was vividly portrayed, and a vigorous appeal was made 
to pass a voluntary bankruptcy act which would enable 
these bankrupts to be discharged at once. To a certain 
extent the question was also made a sectional one. The 
chief advocates of the voluntary measures were from the / ,, 
South and the Mississippi Valley section of the West. 
In the House the only sections which registered a major- 
ity vote against the Henderson Bill were the South 
and the states of the North in immediate proximity to the 
Mississippi river. 

The law is strong in its administrative features, and for 
this reason it has been saved from repeal. It provides 



328 MERCANTILE CREDIT 

jv^ for a bankruptcy court in every county in the United 

States, and on this account the opposition to the former 

laws because of the inconveniences and costs 

Elements ^£ attending the national courts has disap- 

of strength 

in the law. peared. The functions of the trustees and 

referees are clearly stated, and their fees 

^ are Hmited. The closing up of estates is put in the 

(hands of creditors, and as the fees of officials cannot be 
collected until all the business affairs are settled the 
best inducement is offered to settle estates as early 
as possible. 

One of the fundamental defects of the law was the 
definition of bankruptcy it introduced. Under this Act 
a person is not considered insolvent when the 
f ^tures aggregate of his property, exclusive of any 
^property which he ''may have conveyed or 
concealed with intent to defraud, hinder, or delay his 
creditors," shall not at a fair valuation be sufficient in 
. amount to pay all his debts. This definition of insol- 
vency is different from any previous definition of the time. 
Ordinarily an insolvent is one who cannot pay his debts 
when they mature, or one whose liabilities exceed his 
assets. If solvency is proved by the alleged bankrupt 
at the time an action to make him a bankrupt is taken, 
in the great majority of instances the case must be 
dismissed, and the costs involved, including attorneys' 
fees of the defendant must be borne by those who bring 
the suit. In this we see clearly the handwriting of the 
> debtor classes. 

In order to put a man in bankruptcy petitioners must 



BANKRUPTCY ACT OF 1898 329 

give bond to indemnify the alleged bankrupt for costs in- 
curred if they fail to prove their case. Under the law of 
1867 the creditors took no risks. With this law the 
creditor takes all risks, the burden of proof is imposed 
upon him, and he bears the costs if his action has been 
hasty. In proving fraud everything seems to depend on 
the intent of the debtor, and the whole burden of proof is 
with the creditor. Even if fraud is proved the petitioner 
is liable for damages done the debtor if the property of 
the latter, aside from what has been fraudulently manip- 
ulated, is adequate to pay his debts. To protect the 
honest debtor the law shielded the dishonest, and it did 
not make fraud a crime. In some cases it was necessary 
for the creditor to prove that the debtor kept books before 
the latter could be compelled to produce them. The 
involuntary law, the one most desired by creditors in the 
interests of a sound credit system, was thus hedged about 
by so many limitations as to make it at times of doubtful 
value. 

A good involuntary law is necessary to all bankruptcy 
legislation. Without it a debtor can determine when he 
will become a bankrupt, and in his liberty to 
do so there are many dangers. He could sell ^ages of a 
his property in bulk, transfer it as he pleased, good in- 
permit liens on his estate to secure preferences, v<>l^^tary 
and then await a sufficient lapse of time 
before announcing his desire to have a bankrupt's priv- 
ileges, to shield his fraudulent conduct from a bankruptcy 
court. With a good involuntary bankruptcy law the 
conduct of the debtor is checked, for if he is guilty of 



330 MERCANTILE CREDIT 

fraud he does not know at what time action may be 

taken against him, and a bankruptcy court may be 

called on to pass judgment upon his methods. A well- 

I balanced law ought to protect creditors from fraud as 

( well as debtors from oppression/ and one of the defects 

of this original law consists in erecting barriers to prevent 

the prosecution of dishonest debtors. 

Preferences are strictly prohibited by the law. Any 

judgment which is procured or permitted to be made in 

favor of any one while the debtor is insolvent, 

^®^®'" the effect of which will give one creditor a 

ences pre- 

vented. larger percentage of his debt than any other 

person, is considered a preference; also, if a 
bankrupt gives a preference within four months before 
filing a petition or after filing the application and before 
the adjudication of the estate, the property or its value 
may be received by the trustee. The latter feature has 
made uncertain the work of the credit man. All liens 
secured or claims obtained against a debtor depend for 
their validity upon the probability of the debtor's going 
into bankruptcy within four months from the date of 
such preferences. Creditors have all along taken their 
chances. They have secured preferences in the same way 
as formerly, and have taken chances on having to surren- 
der their claims. Even where creditors have secured 
preferences, they have often been debarred from taking 
action against debtors for further claims, since by doing 
so they would be compelled to surrender the advantages 

^ The law has been greatly improved in these respects by 
,?" amendments. 



BANKRUPTCY ACT OF 1898 331 

already secured. A man who had a claim secured for 
S50,000 would not be likely to take action to obtain the 
payment of a debt of $25,000 if by doing so the debtor 
would be forced into bankruptcy, and the $50,000 would 
have to be surrendered to be equally divided between all 
the creditors. 

Under the law of 1867 the restrictions upon voluntary 
bankruptcy were very stringent and discharge was 
difficult. Under the law of 1898 discharge is 
comparatively easy. But two things prevent 7; 
a discharge: (1) An offense which is punish- f^^^ 
able by imprisonment;^ (2) failure to keep bank- 
records or a destruction of records with intent ruptcy 

6asilv 
to commit fraud. Neither a fraudulent prefer- ^^^y^L^ 

ence nor the sale of goods in bulk will prevent 
a discharge. A failure to keep books or a destruction of 
records is inadequate to prevent a discharge unless in 
doing so fraudulent intent can be proven. If a debtor 
swears to his true condition, gives his property to his 
creditors, and turns his estate over to them, he must be 
discharged. Most laws both abroad and at home make 
the payment of a certain percentage of debts a condi- 
tion necessary to a discharge. Not a cent needs to be 
turned over to creditors to permit a discharge if it can be 
shown that the debtor has no more property than the 
laws of the state permit a bankrupt to have. 

The law does not interfere with the exemption laws of 
the states. In this respect it does not provide for the 
uniformity which credit men desire. The laws of the 

* See subsequent amendments. 



332 MERCANTILE CREDIT 

states are very different on this point. Some exempt a 
certain minimum both of personal property and real 
estate. Others leave the homestead with the 
Law does bankrupt without regard to its value. In 
interfere Texas the bankrupt is allowed $5,000 for the 
with lot upon which the homestead stands, and the 

exemption homestead also whatever its value may be. 
states. -^^ ^^^^ Wisconsin and Kansas the homestead 

^. — ' is exempt. In these states if a man is about 

to become a bankrupt, a large part of his property may 
be put in a homestead and his creditors have no recourse. 
To give credit with safety, the credit man must have a 
knowledge of the homestead laws of the various states, 
and consequently different practices must be followed by 
credit men in giving credit. 

With all its defects the friends of national bankruptcy 
legislation believed that it was superior to the insolvency 
legislation of the various states. 

The amendments to the Act of 1898, approved Febru- 
ary 5, 1903, were attempts to correct shortcomings which 
experience in putting the law into practice 

Amend- proved to exist. To the two causes prevent- 

ments of 

1903. i^g ^^^ discharge of a bankrupt four others 

were added: (l) Securing property upon a 
written false statement to secure credit; (2) transferring 
or concealing property four months prior to the filing of 
a petition in bankruptcy with intent to defraud creditors; 
(3) having been granted a discharge in voluntary bank- 
ruptcy within six years; (4) refusing to obey any of the 
orders of the court during bankruptcy proceedings. 



BANKRUPTCY ACT OF 1898 333 

Another amendment gives creditors power at a meet- 
ing for the purpose of examining a bankrupt to examine the 
wife of a bankrupt on matters concerning business trans- 
acted by her, to determine if she has ''been a party to any 
business of the bankrupt." This amendment is of value 
in all cases where the husband keeps his property in his 
wife^s name, pretending to act as her agent. Any other 
person may be called before the court to be examined 
with reference to his business relations with the bankrupt. 

The fees received by trustees were changed by another 
amendment to the law. Aside from the fee allowed by 
the court when the petition in bankruptcy is filed, trus- 
tees may be allowed commissions on all disbursements 
made by them not "to exceed 6 per cent, on the first $500 
or less, 4 per cent, on all sums in excess of $500 and less 
than $1,500, 2 per cent, on moneys in excess of $1,500 and 
less than $10,000, and 1 per cent, on moneys in excess of 
$10,000." 

Many other amendments, not of a radical character yet 
essential in strengthening weak points in the law, were 
passed. The amendments of the Act of June, 1906, were 
all of a minor character. 

In each of the last three years— 1908, 1909, and 1910— 

bills have been before Congress to amend the National 

Bankruptcy Act for the purpose of making it 

more satisfactory to creditors. The bill Proposed 

measure 
introduced in 1908 by Congressman Sherley of 1903. 

of Kentucky, was framed at a conference of 

representatives of the National Bar Association, the 

National Association of Credit Men, the National Board 



334 MERCANTILE CREDIT 

of Trade, the Merchants^ Association of New York, and 
the Commercial Law League of America. It was con- 
sidered too radical a measure and was defeated. In 1909 
a bill somewhat less radical, also introduced by Congress- 
man Sherley, passed the House but was not reported out 
from the committee of the Senate to which it had been 
consigned, and was consequently defeated. 

Some very important amendments were passed in 1910. 
One of the most important regulated the compensation 
of receivers and trustees. It was claimed that 
Amend- ^qq much of the assets of estates were absorbed 
1910 ^y these officials, the courts holding that 

limited they had unlimited discretion in their allow- 
compen- ances to these assets. Neither the law of 1898 
offic'iyof ^^^ *^^ amendments of 1903 and 1906 at- 
court. tempted to limit the fees of receivers, and in 

practice they received more for their services 
than trustees both when they were mere custodians of an 
estate for a week or two and when they had charge of 
an estate conducting the business for several months. 
The amendments reduced the compensation of all the 
officers to commissions, which varied with the amounts in- 
volved and were computed upon the actual cash realized 
by creditors. The maximum amount which could be 
paid officials was stipulated, the courts having power to 
allow less if they chose to do so. 

Trustees were allowed a fee of five dollars when the 
petition was filed except when a fee is not required of a 
voluntary bankrupt.^ Trustees, receivers, and marshals 

1 Section 48 of Act. 



BANKRUPTCY ACT OF 1898 335 

were to receive a commission on all moneys disbursed or 
turned over to any person "not to exceed 6 per cent, on 
the first $500 or less, 4 per cent, on moneys in excess of 
$500 and less than $1,500, 2 per cent, on moneys in excess 
of $1,500 and less than $10,000, and 1 per cent, on moneys 
in excess of $10,000."! 

In the case of the confirmation of a composition, the 
trustee, receiver or marshal may be allowed by the 
court commissions not to exceed 1/2 per cent, of the 
amount to be paid creditors. It is further stipulated 
that when the receiver or marshal acts as a mere custo- 
dian, and does not carry on the business of the bankrupt 
he shall not receive "more than 2 per cent, on the first 
$1,000 or less, and 1/2 per cent, on all above $1,000 
on moneys disbursed by him or turned over by him 
to the trustee and on moneys subsequently realized 
from property turned over by him in kind to the 
trustee."^ Before any allowance is made a notice 
must be given to the creditors specifying the amount 
requested. 

Another section of the Act was amended so that re- 
ceivers, marshals or trustees could be authorized to con- u""^ 
duct business of bankrupts for limited periods. In such 
cases the maximum compensation which can be allowed 
them by courts is fixed at "6 per cent, on the first $500 or 
less, 4 per cent, on moneys in excess of $500 and less than 
$1,500, 2 per cent, on moneys in excess of $1,500 and less 
than $10,000, and 1 per cent, on moneys in excess of 

* Section 48 of Act. 
2 Section 48— d. 



336 MERCANTILE CREDIT 

$10,000/^^ In case of the confirmation of a composi- 
tion the commissions cannot exceed 1/2 per cent, of the 
amount paid creditors. 

Another amendment increased the power of trustees, 
giving them control over "all property in the custody 
or coming into the custody of the bank- 
Powers of ruptcy court/^' and vesting in them '^all the 
trustees i. i <• t 

increased, nghts, remedies, and powers of a creditor 

holding a lien by legal, or equitable proceed- 
ings; and also, as to all property not in the custody of 
the bankruptcy court, shall be deemed vested with all the 
rights, remedies, and powers of a judgment creditor 
holding an execution duly returned unsatisfied.'' 

The purpose of this amendment was to give the trustee 
\ the same right which any creditor would have if bank- 
ruptcy proceedings had not been instituted. A decision 
of the Supreme Court in the case of York vs. Cassell, 
held that the title of a trustee is simply that of a debtor, 
and that he has no more power than the bankrupt had. 
It held that if the bankrupt cannot set aside a transfer 
the trustee cannot do so because he has no more power 
than the bankrupt has. The effect of this decision was 
to prevent the creditors from setting aside a conveyance 
or preventing the evils of secret liens, because when the 
bankruptcy court took possession of the property the 
creditors were no longer free to act. 

Another amendment makes it possible for the bank- 
rupt to offer terms of composition to his creditors after 

* Division E., Section 48. 
2 Section 47. 



BANKRUPTCY ACT OF 1898 337 

he has been examined in open court or at a meeting of 
the creditors, and after he has filed a schedule of his 
property and a list of his creditors. When a 
majority of his creditors representing a ma- ^°^P°^*" 
jority of the claims against him accept his 
terms, he may apply for the confirmation of a composi- 
tion which the court is required to grant when it is 
convinced that such action is in the interest of creditors 
and that the bankrupt is not guilty of an offense which 
would prevent his discharge. Although it is possible for 
a debtor to make a composition with his creditors under 
the common law, under this bankruptcy statute a com- 
position agreed to by a majority in number and amount 
of the creditors and approved by the court, is binding on 
all creditors, even including those who do not agree to it. 
Settlements by composition have the merit often of 
freeing from the stigma of bankruptcy one who is in- 
solvent, of providing for a quick settlement, and of giving 
creditors in most instances larger shares than they would 
receive by regular bankruptcy proceedings. 

The amendment of 1874 to the law of 1867 provided 
for compositions both before and after adjudication in 
bankruptcy. The EngHsh Bankruptcy Act of 1890 per- 
mits compositions of creditors with debtors under the 
supervision of the court, and these official settlements 
have become common in England. They have the 
merit (1) of making speedy settlements between debtors 
and creditors, (2) of preventing the creditor from being 
stigmatized as a bankrupt, and (3) of reducing court 
expenses for the administration of an estate. 



338 MERCANTILE CREDIT 

By the law of 1898 any person who owed debts except 

a corporation could become a voluntary bankrupt. An 

amendment of 1910 gives all corporations 

^ Corpora- ~- ,— ^. ,,. ^ ^. 

tionsmay except pubhc and quasi-pubhc corporations 

become the privilege of voluntary bankruptcy. ** Any 
voluntary person, except a municipal, railroad, insurance, 
or banking corporation, shall be entitled to 
the benefits of this act as a voluntary bankrupt."^ 
The extension of the voluntary provisions to corpora- 
tions was seriously objected to by the opponents of the 
law. Corporations are formed, they argued, so that 
individuals may restrict their liability or be free from 
liability altogether. Why should we enlarge the op- 
portunity, they urged, for people to free themselves from 
the payment of their just debts? 

Another amendment is very explicit with reference 
to corporations that may be made involuntary bank- 
Corpora- rupts. It states that ''any moneyed, business 
tions as in- or commercial corporation, except a munici- 
voluntary p^l^ railroad, insurance, or banking corpora- 
^*^* tion owing debts of $1,000 or over, may be 
judged an involuntary bankrupt."^ The same cor- 
porations may be made involuntary bankrupts that 
have the right of voluntary bankruptcy. Prior to this 
only those corporations which were ''engaged principally 
in manufacturing, trading, printing, publishing, mining 
or mercantile pursuits could be made involuntary bank- 
rupts.'' In differentiating between these and other 

^ Division a, Section 4. 
2 Division b, Section 4. 



BANKRUPTCY ACT OF 1898 339 

corporations many anomalous distinctions were made by 
the courts in determining what are trading corporations, 
or corporations engaged in mercantile pursuits. Laun- 
dry companies, livery stables, mercantile agencies, 
hotels, and companies which construct bridges and piers, 
etc., have been by different courts included and excluded 
from the class of corporations which come within the 
province of the involuntary bankruptcy law. It was 
chiefly for the purpose of avoiding confusion resulting ^ 
from diverse decisions of the courts that an attempt was 
made to substitute a logical for an arbitrary classifica- 
tion of corporations. 

The law excluding wage earners and farmers from ^ 
the provisions of involuntary bankruptcy remained 
unchanged. 

The original law governing the discharge of bank- 
rupts was strengthened by the amendments of 1903. 
A new amendment was added in 1910. A trustee is 
given the power of opposing the discharge of a bankrupt ^ 
when he is authorized to do so at a meeting of creditors 
called for the purpose. The expenses incurred by the 
trustee are borne by the estate and are thus distributed 
among the creditors, whereas heretofore any creditor 
who opposed the discharge of a bankrupt was compelled 
to do so at his own expense. 

In the section pertaining to the filing and dismissing 
of petitions it was provided in the former law that ''a 
voluntary or involuntary petition shall not be dismissed 
by the petitioner or petitioners for want of prosecution 
or by consent of parties until after notice to the cred- 



^ 



^ 



340 MERCANTILE CREDIT 

itors.'^ But no provision was made to notify the cred- 
itors other than the petitioners, since the court had no 
The filine paeans of knowing the names of the other 
and dis- creditors. The practice was common in many 
missing of districts of dismissing involuntary petitions 
pe ons. i^y request of the bankrupt, after the consent 
of the petitioners was secured. In some cases courts 
of bankruptcy have been used as a means of giving 
preferences by having proceedings dismissed after the 
petitioning creditors were paid in full. An amendment 
to the above clause prevents this abuse since the court 
must, "before entertaining an application for dismissal, 
require the bankrupt to file a list, under oath, of all his 
creditors, with their addresses," so that the intent of 
the law can be carried out by actually notifying all the 
creditors of the petition for a dismissal. 

Another paragraph is added to the division on Pre- 
ferred Creditors. It makes more definite the matter of 
preferences where the instrument of transfer must be re- 
corded. If the registry of transfer is made within four 
months before the filing of the petition in bankruptcy, 
and the bankrupt is insolvent, and if the transfer operate 
as a preference and the person benefited by it has 
grounds to believe that the transfer is in effect a prefer- 
ence, it is within the power of the trustee to recover the 
property. In this case the amendment dispenses with 
the requirement of proof that the debtor intended to 
give a preference, a thing which is always difficult to 
prove. 

The Bill introduced in 1908 was very carefully drawn 



BANKRUPTCY ACT OF 1898 341 

and became the model for the measures submitted in ^ 

1909 and 1910. Some concessions were made to those 

who opposed bankruptcy legislation, and con- ^. 

sequently some provisions deemed very im- proposed 

portant were not included in the amend- measure 

ments of 1910. One of these sections modi- ^^ ^^^® 

more 
fies the definition of insolvency so that a person radical 

would become insolvent when the aggregate than the 

of his property, exclusive of that "which is law which 

r 1 . ,1 i. passed, 

exempt from bemg taken on execution 

under the laws of the United States or of the state or 
territory in which the proceedings in bankruptcy were 
begun,*' is inadequate at a fair valuation to pay his 
debts. The property excluded from valuation as a part 
of the assets of the debtor under the present law, is that 
which has been concealed, conveyed, etc., with intent 
to defraud. The necessity of inserting the additional 
clause was made obvious in the litigation of cases in 
states which have liberal exemption laws. The opposi- 
tion to this clause was so strong that it was struck out 
of the Bill proposed in 1909, and it failed to pass as one 
of the amendments of the Act of 1910. The justice of 
the proposed change in determining insolvency cannot be 
called in question since the alleged bankrupt should have 
an adequate amount of property to pay his debts, which 
would be divided in case of bankruptcy among his 
creditors. 

Another amendment proposed in the Act of 1908, but 
which faile(J to pass in 1910, made the failure to account 
satisfactorily "for a loss or deficiency of assets which 



342 MERCANTILE CREDIT 

contribute to his bankruptcy" an objection to a dis- 
charge. This feature is new in bankruptcy legislation, 
having been introduced for the first time in the English 
Bankruptcy Act of 1890. 

Many speeches were made in both branches of Congress 
favoring the repeal of the law. Motions to repeal the 
Attempt ^^^ were defeated in the House in 1909 by a 
to repeal vote of 182 to 111, and in 1910 by a vote of 

law of 156 to 90. These votes practically ended the 

1898 

efforts of the opponents of national bank- 
ruptcy legislation to consign the law of 1898 to the same 
fate as its predecessors met. 

The arguments in opposition to the Bankruptcy Act, 

and especially to the amendments to it, made by the 

minority of the judiciary committee may be 

^" summarized under the following heads: (1) 

against The proposed amendments are in the inter- 
national ests of organized special classes; (2) the wide 

f ' expanse of territory gives a large variety of 

islation industrial and commercial interests to which 

when Act one uniform law is not adapted; (3) the costs 

of 1910 Qf closing estates under a national Act are 

was 

pending. greater than under state laws; (4) the primary 

object of the bankruptcy law is to relieve un- 
fortunate debtors from the weighty oppression of debts 
impossible for them to pay, and the proposed amend- 
ments are especially hard on the debtor classes. 

The proposed amendments were urged by creditors in 
behalf of creditors, but it would not be difficult to prove 
that the changes contemplated would also benefit honest 



BANKRUPTCY ACT OF 1898 343 

debtors. Opposition to the law seemed to be aroused 
by interests independent of debtors and creditors that 
would profit by a repeal of the law. 

There is no reason why one uniform bankruptcy law 
would not apply to all American conditions of bankruptcy 
just as many other laws on the statute books 
apply to a whole set of conditions of one ^ages of a 
kind or another. The strong argument for a National 
National Bankruptcy Act is the weakness of Bankrupt 
the state insolvency laws, which are in opera- 
tion in the absence of a national statute. Most states / 
have no laws authorizing the involuntary seizure and dis- 
tribution of the debtor's property. The southern states 
as a rule and many of the western states as has been / 
shown, are hostile to this sort of legislation, and have \ 
consequently opposed the passage of involuntary laws by 
the United States Government. Trade and commerce 
are now national in their scope, and the best state insol- 
vency laws are inefficient, owing to their limitations to 
state lines. Such laws have no power to bind property 
outside of a state or to relieve a debtor of his obligation 
to pay in full his creditors residing in another state; 
and in most large failures the debtor's property is not 
wholly in one state, nor do all his creditors reside in 
one state. 

It has not been and perhaps cannot be proved that 
the costs of closing estates under the National Act are 
greater than under state laws. Much may be said in 
favor of the contention that the purpose of the Act of 
1898 was to relieve debtors. However, the fundamental 



344 MERCANTILE CREDIT 

purpose of modern bankruptcy legislation is not to re- 
lieve debtors, but to divide the estates of bankrupt 
debtors equitably among creditors, with the least ex- 
pense, and without injury to honest debtors. 



CHAPTER XX 
STATE INSOLVENCY LEGISLATION 

The inadequacy of state insolvency laws has all along 
been the strong argument for national bankruptcy legis- 
lation. The necessity for the regulation of gank- 
trade between the states was the paramount ruptcy and 
argument for the adoption of the Constitu- ^^f ^^^' 
tion of the United States. The Union was s*^*"*^°^- 
about to split up into the various states because each 
had its own way of regulating commerce between itself 
and other states, and contentions arising from unjust 
discriminations frequently led to the verge of civil war. 
As a part of this movement to place the control of inter- 
state commerce in the hands of the national government, 
the constitution conferred on the general government 
the power of passing bankrupt laws. 

The limitations on the powers of the states in their 
insolvency legislation proved to be an additional reason 
for the assumption of this power by the gen- 
eral government. In almost every large fail- insolvency 
ure the debtor's property is not wholly within ' laws are 
one state nor do all the creditors reside in *^^^®" 
one state. The insolvency laws of a state 
cannot enable a debtor to be discharged from the pay- 
ment of debts owed in another state. Complete dis- 

345 



346 MERCANTILE CREDIT 

charge is thus in many cases impossible of attainment 
under state laws. In most bankrupt laws and in the in- 
solvency laws of many of the states, the desires of a cer- 
tain percentage of the creditors in number and in amount, 
bind the rest with reference to terms on which estates are 
closed. But under the insolvency laws of a state no 
decision of the creditors of a debtor of that state can bind 
creditors residing in other states. 
As a rule the state laws define an insolvent as one 
' who is unable to pay his debts as they mature in the or- 
dinary course of business. All that have 

Definition insolvency laws of any kind provide for vol- 

01 8n 

insolvent, ^ntary insolvency, and a number of the states 

provide also for involuntary insolvency. 
As a rule in voluntary insolvency, debtors in failing 
i circumstances may apply to the court having juris- 
diction, offering to surrender their property 

Voluntary ^^ ^^ divided among their creditors. At the 
insolvency . . , . 

laws. *^^® ^^ presentmg their petition or subse- 

quently, they are required to give the names 
of their creditors, their places of abode, the amounts 
owing each, etc. Usually this statement is made under 
oath. The assignment of the debtor's property does not 
affect that which under the laws of the state is left with 
insolvents. In some states, California, Wisconsin, 
Nevada and Massachusetts,^ the debtor must owe a 
certain sum of money before he can apply for the bene- 
fits of the law. 

* The amount required in California and Wisconsin is $^00; in 
Nevada $500; in Massachusetts $250, and in Idaho $300. 



STATE INSOLVENCY LEGISLATION 347 

Maine, Vermont, Massachusetts, Rhode Island, Con- 
necticut, Maryland, Minnesota, Louisiana, Nevada, and 
California have involuntary as well as vol- jnyoiun, 
untary insolvency laws. The petition to tary 
make a debtor a bankrupt must be filed by insolvency 
creditors with the judge of the local court, 
charging him with an attempt to evade the payment of his 
just debts. The debtor's fleeing from the state where he 
resides, removing his property, or concealing his property 
with the apparent intention of defrauding his creditors, 
preferring creditors, allowing judgment to be executed in 
favor of creditors, or taking action in contemplation of in- 
solvency, are the usual conditions which give creditors 
the right to force a debtor into insolvency. Some officer 
of the court takes charge of the debtor's property, a meet- 
ing of the creditors is called, at which the debtor may 
attend, and the petitioning creditors are required to 
establish one or more of the above charges before the 
court can act favorably on their petition. With a few 
minor differences the laws of the various states with 
reference to involuntary insolvency are similar. Some 
states require the petition of a certain number of the 
creditors, and others require the owing of a minimum 
debt, as requisite to involuntary proceedings. 

After the petition is granted the methods of ^iethod of 

procedure 
procedure in both voluntary and involun- j^ ^oth 

tary bankruptcy are practically the same, voluntary 

The debtor must furnish to the court under ^^^ ^^" 

oath a list of his creditors, their residence, i,ank- 

the amounts owing each, and his total assets, ruptcy. 



348 MERCANTILE CREDIT 

At a meeting of the creditors called by the court, they 
are required to prove their claims against the debtor's 
estate, and those proving their claims elect an assignee 
or assignees to take charge of the debtor's property. 

In most of the states a double majority is required, that 
is, a majority of creditors who hold claims representing 
over one-half of the amounts owed by the debtor. The 
assignee possesses the same privilege with reference to 
the debtor's property as the latter would enjoy in the 
absence of insolvency proceedings. He collects all debts 
owed the debtor's estate, and under the supervision of 
the court, distributes the debtor's property equally among 
the creditors. In most states he is required to give bond 
for the faithful discharge of his duties. Some states 
prescribe conditions under which he may be removed. 
Some states prescribe that he be allowed a reasonable 
compensation or compensation on a percentage but even 
under the common law, he is to be allowed reasonable 
pay for his services. In several states the debtor selects 
his own assignee. When making an assignment in In- 
diana^ and Ohio^ the debtor may select his own trustee, 
unless creditors representing over one-half of his debts 
object, in which case the Circuit Judge chooses the trus- 
tee. In Wyoming^ the assignee selected by the failing 
debtor must give adequate notice of his appointment in 
newspapers and must have the property which comes in 
his possession appraised by two trustees. 

1 Brown's Annotated Statutes Review, 1208. 

2 Bates' Annotated Ohio Statutes, Vol. 2, Section 3141-3167. 
2 Wyoming Compiled Statutes, 1910. 



STATE INSOLVENCY LEGISLATION 349 

In some western states, notably Utah and Oklahoma, a 
voluntary assignment for the benefit of creditors is void 
under the following conditions: (1) if a prefer- 
ence is granted on a contingency; (2) if it tends ^^^ 
to coerce a creditor to release or compromise solvency 
his demand; (3) if it provides for the payment i^ ^t^h 
of a claim known to be false; (4) if it reserves ^ 
any interest to the debtor not allowed by state 
laws before the debts are paid; (5) if it confers power on an 
assignee to delay the disposition of the property. 

An existing attachment is not made void by proceed- 
ings in insolvency unless there is a specific law prohibiting 
such attachments. On this account in the states^ where 
no such laws exist, creditors are vigilant in securing pre- 
ferred claims by getting attachments on the debtor's 
property. However, the laws of many of the states 
make attachments void when obtained within a prescribed 
time previous to insolvency. Even in such cases, vigi- 
lant creditors secure preferred claims, taking chances 
that the time of these claims will not fall within the pre- 
scribed limit. 

Many states make the conveyance of property imme- 
diately preceding insolvency proceedings to keep it from 
falling into the hands of creditors fraudulent, and such 
property may be reclaimed by the assignee. In these 
states false claims paid out immediately preceding 
insolvency proceedings may also be recovered by the 
assignee. 

When an estate is closed all the creditors share equally 

* Dunscomb: Bankruptcy, p. 163. 



350 MERCANTILE CREDIT 

in proportion to their claims after the preferred debts are 
paid. These in order of priority of claim are (1) debts 
due the United States; (2) debts and taxes 
d bt owed the state; (3) in some cases the claims 

of a landlord for rent; (4) in many states, 
wages for labor performed within a limited period pre- 
ceding insolvency ; (5) preferred creditors. 

The conditions of discharge vary in different states. 
As a rule the debtor must surrender his property for the 

^ ,. . benefit of his creditors, giving a correct in- 
Conditions » . , » , . ,. , . 

of dis- ventory of it, the names of his creditors, their 

charge in residences, and the amounts owed each. In 
different gome cases he is required to state the causes 
of his indebtedness. In some states he may 
file a petition for his discharge when he surrenders his 
property; in other states he must postpone his ap- 
plication several months. After his property is divided 
among his creditors, if he has not been guilty of fraud, he 
may be discharged by the court from the payment of 
the residue of his debts. Fraudulent conduct, which 
prevents a discharge, often means, as in Wisconsin,^ 

(1) swearing falsely regarding his estate and debts, 

(2) selling or transferring property after petitioning to be 
adjudged a bankrupt, (3) secreting his estate or books, 
and (4) preferring creditors or permitting an unfair claim 
to prevail against the estate. 

In some states, especially in New England, the desires 
^ of the creditors are considered in granting a discharge.^ 

1 Wisconsin Statutes, 4282-4206. 

2 Revised Laws, 1902, Vol. II, pp. 1433-1468. 



STATE INSOLVENCY LEGISLATION 351 

In Massachusetts, if the assets do not pay 50 per cent, of 
the debts, a debtor cannot be discharged without the 
consent of a majority in number and in value g^nk- 
of the creditors. If the debtor becomes a ruptcy in 
bankrupt a second time, then the consent of N®^ 
three-fourths in number and amount of the °^ *^ ' 
creditors is necessary to a discharge. The debtor is pre- 
vented from receiving a discharge if he has failed to keep 
proper books; however, in this case if he is not guilty of 
fraud, the court may discharge him after six months, if 
his debts do not exceed $5,000 and if two-thirds in num- 
ber and amount of his creditors consent to his discharge. 

In Maine ^ a debtor may be discharged if he is not 
guilty of fraud. A second discharge requires the consent 
of a majority in number and value of his 
creditors, and a third requires the consent of discharge 
three-fourths in number and value of the jj^ Maine, 
creditors. When a debtor is a voluntary 
bankrupt the consent in writing of a majority in number 
and amount of his creditors is necessary to a second and 
a third discharge. 

When a debtor applies for a discharge in New York,^ 
he must send with his application the petition of his 
creditors to whom he owes at least two-thirds of his 
debts. 

The insolvency law of Rhode Island^ makes a distinc- 
tion between traders and other classes. If the insolvent 

1 Revised Statutes, 1903, pp. 628-648. 

2 Consolidation Laws, VI, pp. 860-928. 

3 Rhode Island, General Laws, 1909, pp. 1221-1239. 



352 MERCANTILE CREDIT 

petitioning for a discharge is a merchant, manufacturer 
or trader, "he shall not be discharged if he has, within 

four months prior to being adjudged insol- 
solvency vent, failed to keep or has destroyed his books 
law in of account, or papers, from which his true 

Rhode condition may be known, with intent to 

hinder, defraud or delay his creditors; if he 
has given a preference, or made a false statement in 
writing to secure credit, or if he has suffered a lien to be 
secured on his property/' 

Texas ^ has a peculiar assignment law. A debtor may 
make an assignment for the benefit of as many creditors 

as will accept the terms of payment made 
Insolvent possible by the distribution of his property. 
Texas. '^^^ insolvent is then discharged from the 

payment of further sums to these, providing 

that the debtor^s assets will pay one-third of the claims 

of these. The insolvent is not discharged, however, from 

the payment of all claims in full of those who do not 

accept the terms of settlement and who consequently 

receive nothing from the distribution of the assets of the 

debtor. 

Insolvent laws in the earlier sense, that is, that action 

the purpose of which was to secure a discharge from 

Imprison- P"son, must be initiated by debtors are uni- 

ment for form in Arkansas, Illinois, Kentucky, Mon- 

insol- tana. New Jersey, New York, North Carolina, 

vencv 

Ohio, Pennsylvania, and Wisconsin. As a 

rule in these states, when a debtor is arrested and placed 

* Civil Statutes, Sayles 21, pp. 61-73. 



STATE INSOLVENCY LEGISLATION 353 

in jail, he applies to the court for a discharge from jail, 
appending to his petition an inventory of his property, 
giving its amount and value, stating the names and 
residence of his creditors, and declaring that he is willing 
to surrender his property for the benefit of his creditors. 
The court calls a meeting of the creditors to enable them 
to give reasons why the debtor should not be discharged. 
If it is established that the debtor has not committed a 
punishable offense under the law, he is discharged from 
prison. In most cases the debtor is given the privilege 
of a trial by a jury if he desires it. When convicted of 
certain classes of frauds, in several states debtors may be 
sent to prison. 

The most complete bankruptcy laws are found in New / 
England. All of the New England States have both J 
voluntary and involuntary bankruptcy laws. 
The creditors elect their assignee and the de- ^^^^ j^^^ 
sires of the creditors as a rule, are considered in in New 
discharging an insolvent from his debts. The England 
law states in great detail what the insolvent ^^^^ , , 
is required to do both in voluntary and in in- 
voluntary insolvency. The Acts preventing a discharge 
are very clearly set forth. Several months preceding the 
Acts of insolvency the debtor cannot grant preferences, 
and attachments made within that period may be 
dissolved. 

In her insolvency laws Georgia makes the same dis- 
tinction between traders and non-traders as was formerly 
observed in England, and is still observed on the conti- 
nent. Traders only may be made involuntary bankrupts 



354 MERCANTILE CREDIT 

whereas all other classes have the privilege of voluntary- 
bankrupts. Any person is defined as a trader^ "who is 
engaged in buying and selling real estate or 

Insolvent personal property, or who is a banker, broker, 
I3.WS in 

Georgia. commission merchant or manufacturer of arti- 
cles which exceed in value $5,000 a year.'* 
When a debtor fails to pay his debts as they mature, 
creditors representing one-third of the unsecured debts 
may petition the court of equity to collect the debts. 
The chancellor has the right to grant injunctions and to 
appoint receivers. After the appointment of receivers 
no creditor can acquire a preference or secure a lien or 
judgment against the property of the debtor. After 
the debtor has surrendered all his property for the benefit 
of his creditors, the chancellor may recommend that the 
creditors release him from further liability to pay the 
balance of his debts; but the power to do so is wholly in 
their hands. 

Corporations, other than municipal, have the privilege 
of making an assignment, but in doing so they are not 
permitted to prefer creditors.^ Persons and firms in 
making an assignment may prefer creditors, giving 
mortgages, liens, etc. Assignments must convey all 
property and lists of creditors with their addresses and 
the amounts owed each must be furnished. Within 
fifteen days the assignor and assignee must prepare lists 
of property with its valuation, which must be kept on 
file in the County Clerk's office for ten days. Al 

1 Code of State of Georgia, Vol. I, 1911. 

2 Code of State of Georgia, Vol. I, 1911. 



STATE INSOLVENCY LEGISLATION 355 

creditors must be notified, and they have the privilege 
of inspecting these lists. 

Louisiana has both a voluntary and an involuntary in- 
solvency law/ Her insolvency law resembles the bank- 
ruptcy system of the continent and on that 

Insolvent account it has from the American point of 
law in . 1. ,. TT r M 

Louisiana. ^^^^ some pecuhar features. Upon failure 

to pay his debts a judgment creditor may 
compel his debtor to produce his property by petitioning 
the court to have the property surrendered. The court 
then requires the debtor to file a list of his property, the 
names of his creditors, their residences, and the amounts 
owing them. The j udge then calls a meeting of the credit- 
ors at which a majority in number and amount determine 
if the debtor's property is to be surrendered. If the 
property is to be surrendered the creditors elect syndics 
who take control of the property. Upon refusal to sur- 
render his property, a debtor may be sent to jail. 

A fraudulent debtor is defined as one who has neglected 
to declare any of his property, "who has changed or 
concealed his books," who has given a preference within a 
year of the acts of insolvency or who committed any 
other act to defraud his creditors. When the debtor is 
convicted of fraud by a jury he is to be sentenced to 
imprisonment for three years, and is to be deprived in 
the future of the privileges of the insolvency law. If the 
debtor is guilty simply of granting an unjust preference 
he may be relieved from imprisonment by restoring to 

* Constitution and Revised Laws of Louisana, 1904, Vol. I, 
pp. 810-825, Solomon Wolff. 



356 MERCANTILE CREDIT 

his creditors the amount unlawfully conveyed. If the 
preference was given within three months of his failure, 
the preferred creditor loses his advantage and the debtor 
is to be denied the privileges of the insolvency law. 



CHAPTER XXI 

LAWS REGULATING THE SALE OF GOODS 
IN BULK 

Previous to 1900 but three states Louisiana, Oregon, 
and Minnesota, had laws regulating the sale of goods in 
Origin of ^^^^' ^^ January, 1910,^ thirty-nine states 
movement and the District of Columbia had laws 
for bulk governing the sale of goods in bulk. The 
rapidity of the movement in the direction of 
legislation of this class amounting to almost a crusade, 
was primarily the result of action taken by the National 
Association of Credit Men in 1897. Believing that 
rigid legislation regulating sales of this class would 
place credit on a higher plane, this organization through 
its legislative committee carried on a persistent campaign 
in every state in the Union. 

A model law was framed by the National Association 

and then each state in turn was asked to pass the law or 

one including its most important provisions. 

7 r- x- Bulk sales 

The uniformity in the bulk sales laws of the j^^g 

different states is the best evidence of the passed as 

singleness of purpose back of this legislative result of a 

movement. One judge in writing the majority ^J^ ^°^? ^ 

opinion declaring a law unconstitutional 

1 The states not having bulk sales laws at this time were Illi- 
nois, Iowa, Missouri, Arkansas, Alabama, Kansas, South Dakota 
and Wyoming. 

357 



358 MERCANTILE CREDIT 

comments on this fact.^ "Statutes that are passed pro 
bono publico rarely sweep the country with such irresist- 
able momentum, while much fantastic legislation has re- 
sulted from organized crusades upon legislatures by the 
advocates and supporters of special classes. This 
statute is evidently of that kind, which has been so fre- 
quent of late, a kind which is meant to protect some 
class in the community against the fair, free and full com- 
petition of some other class, the members of the former 
class thinking it impossible to hold their own against 
such competition, and, therefore, flying to the legislature 
to secure some enactment which will operate favor- 
ably to them or unfavorably to their competitors/' 
Whatever may be said of the motives ascribed 
by this judge to those responsible for this and other 
legislative campaigns, the results achieved were 
accomplished by careful planning and by persistent 
efforts. 

In the absence of legislation of this sort practices are 
resorted to which are injurious to trade. Credit is 
Regular granted because of the necessity of paying 
methods debts from the proceeds of goods purchased, 
of busi- ii is granted under the assumption that the 
customary methods of trade will be followed 
by the retailer and that the latter will pay his debts when 
his goods are sold. When goods are sold in bulk, the 
customary methods of the merchant are abandoned. The 
seller does not need to make provision to liquidate the 

* Judge Werner in declaring the New York law of 1902 uncon- 
stitutional. 



THE SALE OF GOODS IN BULK 359 

liabilities, and the creditor has no claim whatever against 
the stock after it is sold. 

In selling goods on time the jobber or manufacturer 
considers the credit standing of the purchaser, his 
business ability in his particular trade, his chance for 
success, his honesty, integrity, etc., which are all a 
matter of record. He assumes as a matter of course 
that the business in which the customer is engaged will 
be carried on in the customary way. If the seller be- 
lieved that the regular retail methods would be abandoned 
and that the entire stock would be sold at one time to a 
single purchaser, ordinarily the goods would not be 
shipped, and commercial credit would not be granted. 
It is for these reasons that bulk sales laws make different 
requirements of those who sell goods in bulk from those 
who follow the same methods of trade that are assumed 
when credit is granted, and the advocates of stringent 
legislation insist that no harm or inconveniences will 
come to honest merchants by these distinctions. 

The chief abuse arising from the sale of goods in 
bulk takes as a rule this form. A merchant who has pur- 
chased a stock of goods chiefly on credit, sells 
his entire stock to a single purchaser. He j^jj^se 
realizes at once on the sale and his creditors which the 
are helpless in the absence of legislation to ^^^ s^^®^ 
cover this specific case. The purchaser may ^^ . 
be aware often of the motives of the seller, but 
if the purchase is made at an unreasonably low figure 
he has no financial interest in exposing the purposes of 
the seller. 



360 MERCANTELE CREDIT 

Another irregularity aimed at by the bulk sales law 
is the transformation of a business from the single entre- 
preneur or partnership organization into the corporation. 
The purchasing corporation practically buys up the entire 
stock, good will, etc., and perhaps the buildings and equip- 
ment, although the original owner may become a stock- 
holder in the corporation to the extent of his original 
possessions in the business, and without a law governing 
such sales, the creditors of the seller have no more title 
to his property than if it had been disposed of outright. 

To correct these abuses the National Association of 
Credit Men has proposed a specific law, the chief provi- 
Thepro- sions of which have been incorporated in 
visions of nearly all the laws of the states which have 
the model restricted sales in bulk. The important 
^^' provisions of this law are the following: 

(1) Five days before the sale, the seller and purchaser 
must make a detailed inventory showing the quantity and 
as far as possible the cost price of each article to be sold; 

(2) five days before the sale the purchaser must make an 
inquiry as to names, places of residence or of business 
of all creditors of the seller and the amount owing each 
creditor. A written answer to these inquiries must be 
secured from the seller and retained six months after the 
time of sale; (3) the purchaser, five days before the sale, 
must notify all creditors of the proposed sale, the cost 
price of the goods to be sold and the price to be paid for 
them; (4) five days before the sale the seller must answer 
all questions in writing truthfully, and a failure to do so 
or a failure to make complete and true answers will be 



THE SALE OF GOODS IN BULK 361 

treated as a misdemeanor and be dealt with accordingly. 
A failure to carry out the above provisions makes the 
sale fraudulent and void as against the creditors* 

Bulk sales are made frequently as low as 40 or 50 
per cent, of the real value of goods, and in such cases the 
sale is usually made with intent to defraud, 
and the purchaser is in collusion with the of^oods^ 
seller. In compelling an inventory to be to be sold 
made giving the cost price of the goods to be and noti- 
sold and the proposed selling price, the real creditors^ 
purpose and nature of the transaction is 
made obvious. The purchaser is required to give these 
facts to the creditors of the seller several days before the 
sale takes place, and if the latter is attempting to sacrifice 
the goods with fraudulent intent, his efforts may be 
thwarted by those concerned. The time limit required 
of purchasers to notify creditors prior to the sale varies in 
the different state laws, but in no instance is it less than 
five or more than ten days. 

Most of the laws contain a clause stating that the 
Act shall not apply to sales by executors, administrators, 
receivers, assignees or trustees in bankruptcy for the 
benefit of creditors or to public oflScers conducting sales 
in their official capacity. 

The form of the laws vary with the time of their en- 
actment. Louisiana has the most drastic law on sellers 
and purchasers of goods in bulk, but this law Louisiana 
was passed (1896) before the crusade against b^k sales 
bulk sales was begun by the National Associa- ^^^' 
tion of Credit Men. This law makes it a misde- 



362 MERCANTILE CREDIT 

meaner to purchase goods under a fictitious name 
with intent to cheat or to defraud, and a penalty of a 
fine or an imprisonment from six to twelve months is 
provided. Buying on credit and selling out in the usual 
course of trade with intent to cheat the seller is also 
treated as a misdemeanor for which the above penalty is 
provided. One who purchases goods in bulk which were 
not paid for by the seller, without securing a written 
sworn statement from the seller that the goods had been 
paid for, is considered guilty of a misdemeanor for which 
the usual penalty for that offense in Louisiana, is imposed. 
Fraudulent intent is established in this Act by the failure 
of the vender of goods in bulk to pay the sellers for their 
goods; and by the failure of the purchaser to secure from 
the seller a signed or sworn statement. 

The Oregon law which was passed in 1899 required 
the purchaser of goods in bulk to obtain a written state- 
ment from the seller containing names and 

i addresses of creditors and the amounts owed 

Oregon 

law. each, and these facts were to be communicated 

to the creditors personally or by registered 

letter several days before the consummation of the sale. 

Failure to comply with the provisions of the Act makes 

the sale fraudulent, and a right of action is given to 

creditors of the seller against the purchaser of goods in 

bulk. The making of a false statement by the seller is 

considered perjury or a misdemeanor, and the offender 

is subjected to the penalties imposed by the laws of the 

state for such offenses. The Minnesota law, passed also 

in 1899, contains all these provisions except the last one. 



THE SALE OF GOODS IN BULK 363 

With unimportant exceptions all the laws contain these 
provisions, the important difference being with reference 
to the making of a false statement by the seller a 
criminal offense. Of the states which were first to pass 
bulk sales laws, seventeen made the giving of a false 
statement by the seller, with reference to his goods 
which were sold in bulk, either a misdemeanor or 
perjury. The laws of seventeen other states do not 
make the giving of a false statement a criminal offense, 
but simply make the sale of goods in bulk void and 
fraudulent. The first law passed by Ohio in 1902, 
which was declared unconstitutional, made the giving 
of a false statement by the seller a misdemeanor, but 
the second law passed by Ohio in 1908, also declared 
unconstitutional, contained no provisions whatever with 
reference to a false statement. 

In most of the laws governing bulk sales the seller is 
required to furnish to his purchaser an inventory of 
the stock to be sold, giving the cost price of each item 
so far as he can, and in some instances the -what most 
selling price of the entire stock. He is also bulk sales 
required to furnish him a list of his creditors, 1^^^ 
their residence, and the amounts owed each. ^®^^""®* 

As a rule, this data, together with a notice of the 
time of sale, is to be furnished by the seller to the 
creditors from five to ten days preceding the time of 
sale. In the states where it is required that this inven- 
tory is t o be preserved, it must be retained six months. 
In but few instances do the laws require a public record 
of the inventory. The California law of 1903 requires 



364 MERCANTILE CREDIT 

the seller of goods in bulk to file in the office of the 
county recorder, at least five days before the sale, a 
notice of the sale, the name of the purchaser, and a 
statement of the character of the property to be sold 
and the purchase price. Under this law the purchaser is 
freed from any responsibility in making the transaction. 
The Connecticut law of 1903 requires the seller to re- 
cord in the office of the town clerk, in the town where the 
recorder conducts his business, a notice of his 

The Con- jn^gni^ion to sell the property in bulk, a de- 

necticut .. 

la^^ scription of it, and the name of the purchaser. 

The purchaser is free from any obligation 

with reference to the creditors of the seller except that the 

sale is void if the above requirement is not carried out. 

The South Carolina law (1906) requires the seller of 

goods in bulk, who intends to retire from the retail 

business, to make a complete inventory of all 
The South ^^^ property he proposes to sell with a state- 
la^, ment of the ruling wholesale price of each 

item. The inventory must also include a 
complete list of his creditors with the amounts owed 
each and his statement under oath that the facts re- 
ported are true. The inventory must be furnished the 
purchaser, and copies must be retained in his own 
possession six months. Ten days before the termina- 
tion of the sale, the seller and purchaser must give notice 
to all creditors of the seller of the intended sale and 
purchase. The inventory of the property must be re- 
tained by both seller and purchaser six months, and be 
subject to inspection by any of the creditors. A failure 



THE SALE OF GOODS IN BULK 365 

to carry out any of these requirements makes the sale 
fraudulent, and gives the creditors of the seller a title to 
property in the hands of the purchaser, and the latter 
is made liable for the value of any property he sells. 

Three Acts passed in 1907 introduced new features 
governing the responsibility of purchasers and sellers. 
The Nebraska law requires the customary j^^^ 
inventory to be made by seller and purchaser, features 
and the notice by the purchaser to the credi- i^ ^^^^ 
tors of the seller of the intended purchase of 
the property. The inventory and the notice may be 
omitted if the seller files with the county clerk where the 
stock is situated an agreement with his creditors waiv- 
ing the requirement of the inventory and notice. 

The North Carolina law makes a bulk sale void unless 
the seller makes an inventory of the property with the 
cost price of each item which he proposes to sell and 
notifies all his creditors of the proposed sale. How- 
ever, the inventory and the notice may be waived if 
the seller executes a bond to a trustee covering the 
value of the goods conditioned upon the use of the pro- 
ceeds of the sale to pay creditors the amounts due them 
after making adequate allowance for the value of the 
personal property allowed by law. 

The Nevada law makes the usual requirement of in- 
ventory, notice to creditors of the seller, and considers 
a false statement by the seller perjury, for which offense 
a heavy penalty is given. All the provisions of this Act, 
however, may be waived if the seller secures the consent 
of a majority in number and amounts of his creditors. 



366 MERCANTILE CREDIT 

In four states, New York, Utah, Ohio and Illinois, 
laws have been declared unconstitutional, but in the 
Laws de- ^^^^ ^^^ ^^ these new laws have been passed. 
Glared un- The New York Act of April 11, 1902, was 
constitu- declared unconstitutional but a new Act ap- 
*'°''^^- proved May 3, 1904, is in force. In Utah 

the law of March 14, 1901, was declared unconstitutional, 
but the law of March 9, 1905, is still in force. The 
Ohio Act of April 4, 1902, was declared unconstitu- 
tional by the Supreme Court of the state June 7, 1904, 
and a new law passed April 30, 1908, has also been de- 
clared unconstitutional. The Illinois law passed May 
13, 1905, was declared unconstitutional June 18, 1908. 

In all other states the bulk sales laws are in force. In 
seven of these, Washington, Tennessee, Massachusetts, 
Connecticut, Michigan, Kentucky, and Oklahoma, the 
laws were declared constitutional by the Supreme Courts 
of the states after the issues were squarely drawn on 
constitutionality by lower courts. 

The objections to the laws on constitutional grounds 
were based chiefly upon the infringement of the common 
law, being in restraint of trade, of restricting the right 
of contract, of imposing hardships on certain classes of 
people, and of infringing on the property rights of 
classes of producers. 

The first Ohio law which was declared unconstitutional 
was more drastic than most laws of this class. In con- 
trasting the Ohio law with others to which 

^. . - the attention of the court had been directed 

Umo law. 

that had been declared to be constitutional, 



THE SALE OF GOODS IN BULK 367 

the comment was made that they "present substantial 
differences from those which are involved in the present 
inquiry." The sale of an entire stock of merchandise 
outside of the regular course of trade is considered 
fraudulent against the creditors of the seller unless 
the following regulations are carried out: (1) The seller 
must deliver to the purchaser (a) a complete list of all 
his creditors with their addresses, (b) the amounts owed 
each, and (c) the books or original invoices ''from which 
the cost price of the merchandise can be ascertained"; 
(2) the seller and purchaser are required six days before 
the sale to make an inventory showing the cost price to 
the seller of each item included in the sale; (3) the list 
of creditors, books, invoices and inventory must be 
retained by the seller six months after the sale, subject to 
the inspection of the creditors of the seller; (4) the pur- 
chaser is required to notify in person or by registered 
letter all the creditors of the seller at least five days 
prior to the sale of the goods to be sold, their cost price 
and their selling price. 

If the seller fails to comply with the requirements of 
the law or if his report to the purchaser is incorrect, and 
in consequence of this any creditor is wronged or de- 
frauded, the seller's offense is considered a misdemeanor 
which is subject to a fine or imprisonment or both. 

The decision of the Supreme Court was given in the 
case of Miller vs. Crawford, June 7, 1904.^ The court 
stated as a fundamental proposition from the Bill of 
Rights that "the terms of the instrument compel the 

1 70 Oh. St. 207. 



368 MERCANTILE CREDIT 

conclusion often stated that the holding of private prop- 
erty, its acquisition and its use are subservient only to the 
welfare of the public/' The following propo- 
^j sitions determined the decision of the court: 

Supreme 1. "For every restriction upon the enjoyment 
Court on ^nd use of property there must be substantial 
. reasons of a public character; 2. if a re- 

striction is placed upon the alienation of 
property, it must be for the entire body of the people or, 
at least, of all who are within the reason of its restric- 
tion; 3. a distinction sometimes thought important 
between property in lands and in chattels upon the 
ground that the former is derived from the state, will 
at least justify the conclusion that legislative control 
over chattels is not greater than over lands; 4. the 
express limitations which the constitution imposes upon 
the legislature apply to the exercise of powers which are 
truly legislative in character, and since none but legis- 
lative power is committed to it, the exercise of that 
power is also confined within all the limitations which are 
suggested by its nature." 

The court then goes on to analyze the Act to show that 
its provisions are in conflict with these principles. It 
is asserted that a sale of goods in bulk is absolutely void 
unless all of the various provisions of the Act are com- 
plied with. The requirements of the seller cannot be 
carried out when he does not know who all his creditors 
are and the amounts he owes each. The Act took effect 
as soon as it was passed, and it applied to stocks of 
merchandise however long they were in the possession 



THE SALE OF GOODS IN BULK 369 

of the merchant. The requirement that the seller 
should transfer to the purchaser books or original 
invoices to show the cost price of goods was declared 
impossible of accomplishment when the seller did not 
have adequate data. The decision states, moreover, that 
the purchaser cannot in the nature of things have the 
knowledge necessary for a compliance with the law. 

The court goes on to say "Applying the familiar and 
unquestioned rule that the validity of an Act is to be 
determined by its practical operation and not by its title 
or declared purpose; this Act, under the guise of prevent- 
ing fraud in such sales, prohibits them altogether, and 
thus places on the enjoyment of property an important 
restriction which no public interest requires and which 
the constitution therefore forbids. One who challenges 
the soundness of this conclusion should be prepared to 
maintain the validity of an Act expressly forbidding sales 
of stocks of merchandise in bulk. By the Act the Legis- 
lature has attempted to discriminate unwarrantably 
among debtors and creditors. It does, in liens, apply to 
sales in bulk by wholesale as well as by retail dealers in 
merchandise. But conceding, for present purposes, that 
when reasons for legislative discrimination exist, then 
sufficiency is to be determined finally by the legislature; 
no reason is suggested by council, nor does any occur to 
us, for a legal discrimination in the relation of debtor 
and creditor between those who come into that relation 
with respect to the purchase and sale of merchandise and 
those between whom it exists with respect to chattels in 
general. Although the Act applies to all the creditors 



370 MERCANTE^E CREDIT 

of the seller, it applies to those only who are creditors 
of the owner of a stock of merchandise, and thus an un- 
reasonable burden is imposed upon a limited class of 
debtors for the supposed benefit of a limited class who 
are creditors." 

With reference to decisions affirming the constitution- 
ality of corresponding laws in other states, the court 
asserts that if the reasoning in those cases were accepted 
as sound, ^Hhe cases would be plainly distinguishable by 
essential differences in the provisions of the statutes, and, 
in one instance at least, by a difference in the constitu- 
tional provisions involved." 

A law passed April 30, 1908, was drawn in such a 

manner as to free it from the provisions which made 

the previous law unconstitutional. This law 

has also been declared unconstitutional, 
second 
Ohio law. While the former law contained more rigid 

provisions than most of the laws of other 
states, the provisions of this law are mild as compared 
with those of some states regarding fraudulent convey- 
ances. A sale of goods in bulk made with fraudulent 
intent is void against the creditors of a seller, and when 
creditors bring suit a receiver may be appointed to take 
possession of the assets of the debtor. Unless the seller 
at least seven days previous to the transfer, records in 
the office of the county recorder where the business is 
conducted a notice of his intention to sell the goods with 
their description and the conditions of the transfer, it will 
be presumed that the goods were sold with fraudulent 
intent. The above requirement may be dispensed with 



THE SALE OF GOODS IN BULK 371 

when the sale is made "by order of a court or by an ex* 
ecu tor, administrator, guardian, or assignee." 

The case at issue was one in which a merchant sold 
his goods without having not less than seven days pre- 
vious to the sale published with the recorder The 
of the county as the law required, his in- Supreme 
tention to sell his goods in bulk. The cred- ^lecision 
itors of the seller brought suit against the pur- on second 
chaser of the goods claiming that they were la^* 
sold with fraudulent intent.^ Both the Common Pleas 
and the Circuit Courts decided in favor of the de- 
fendant, and upon appeal, the Supreme Court upheld 
the decision of the lower court in 1911. In its deci- 
sion the Supreme Court followed the same line of ar- 
gument it pursued in holding the former bulk sales law 
unconstitutional. The Court held that this law imposed 
upon a certain class of people in selling goods obligations 
and burdens not imposed on others, as fraudulent intent 
is presumed if those who sell goods in bulk do not 
file with the county recorder at least seven days prior to 
their sale their intention to do so, and they are required to 
prove that the sale was not made with fraudulent intent 
when they do not comply with the above named require- 
ment of the law. All other venders of goods or those who 
sell in any other way than in bulk are not required to give 
public notice of their intention to sell, and in no other case 
is fraudulent conduct assumed before the person is proven 
guilty. Commenting on this the Court says "Counsel 
have not communicated to us any view upon which we 

1 Ohio State Reports, V. 84, pp. 328-345. 



372 MERCANTILE CREDIT 

could sustain the proposition that laws can be equal 
which accord to one, without proof, rights upon which 
they accord to others only upon proof." The decision 
is then concluded with the following significant statement: 
*' It seems to us that this act very plainly from its nature, 
takes its place among the enactments which constitute 
the promoted legislation of the state not suggested by 
comprehensive views of the rights and interests of all the 
people, but furthered by those who desire to obtain ad- 
vantages not accorded by the general law." 

The Bulk Sales law of Tennessee which contains the 
same provisions as the corresponding laws of a majority 
g e ^^ *^^ states was declared constitutional by 

Court the Supreme Court. The Act required an 

decision inventory of goods to be sold, a correct report 
i? from seller to purchaser of the cost price of the 

* goods, the names and addresses of the cred- 
itors of the former, while the purchaser was to notify the 
seller's creditors of the intended purchase several days 
in advance. In the case^ which came up, the issue on 
constitutionality was definitely drawn. 

An attempt was made to set aside the Act as class 
legislation because it applied to those dealing in mer- 
chandise and not to such other persons as farmers, manu- 
facturers, etc. In reply to this the court held that "the 
statute is a mere regulation of the mercantile business, 
designed to secure to creditors of merchants a just par- 
ticipation in the distribution of the assets of such mer- 
chants, and to prevent fraudulent preferences and 

^ Jno. F. Neas vs. Borchus & Co. 



THE SALE OF GOODS IN BULK 373 

practices by them, and is a valid exercise of the police 

power of the state/' The court held that the act was 

valid for the following reasons: 1. "It was intended to 

prevent the practice of fraudulently selling out goods to 

the injury of creditors by merchants; 2. it was merely a 

regulation of the business of merchandising; 3. it is not 

class legislation, and that the limitation of the Act to 

merchants is not an arbitrary classification, that it does 

not take away the property of the citizen, but only 

regulates the sale of merchandise in such manner as to 

prevent frauds." 

The Michigan law which contains the usual provisions ^ 

of bulk sales laws was declared constitutional by the 

Supreme Court Sept. 20, 1906. It was con- g 

tended that the Act was class legislative for Court 

two reasons: "First, because it limits its decision 

operation to merchants, and does not include ^i^. , . 

. Michigan, 
farmers, manufacturers, etc.; second, that it 

does not relate to merchants who owe no debts." The 
court held that "a sufficient reason for not including in 
its provisions merchants who owe no debts is found in 
the apparent purpose of the Act, which is to protect 
creditors. If there be no creditors, there is no one 
requiring protection." With reference to the other con- 
tention, the court held that "it is easy to discover reasons 
for apprehending and guarding against fraudulent dis- 
position of stocks of merchandise by debtor owners which 
would not relate to other species of property." After 
quoting from another decision, the court asserted that 
^ See case of Howard W. Spurr, et al. vs. Dayton A. Travis, et al. 



374 MERCANTILE CREDIT 

this is not class legislation. "It is well known that the 
business of retailing goods, wares, and merchandise is 
conducted largely upon credit and furnishes an oppor- 
tunity for the commission of frauds upon creditors not 
usual in other classes of business/' 

The Supreme Court of Washington sustained the 
constitutionality of the Bulk Law^ of that state even 
g though the law was more drastic in one 

Court particular than bulk laws of most other states, 

decision in Aside from the usual provisions of such laws, 
Washing- ^j^g Washington law definitely stipulates that 
the making of a false statement knowingly or 
wilfully "by the seller to the purchaser with reference 
to his creditors, the amounts owed them, etc., is con- 
sidered perjury, and upon conviction the seller may be 
either imprisoned or fined." 

The Act was objected to on constitutional grounds for 
the following reasons: (1) It deprives persons of their 
property without due process of law; (2) it is in restraint 
of trade. It was contended that the constitution was 
violated on the first ground because the Act restricted 
the right of an owner to dispose of his property. The 
court replied that "the Act does prohibit owners of 
certain kinds of property from disposing of it in a par- 
ticular way, without complying with certain conditions, 
but it is not for that reason necessarily unconstitutional. 
Statutes familiar to every person, such as those regulating 
the mortgaging and sale of personal property, requiring 
certain articles of food made in imitation of other well- 

* John H. McDaniels vs. J. J. Connelly Shoe Co. 



THE SALE OF GOODS IN BULK 375 

known articles to be branded with their true names, 
regulating the sales of poisons, and the like, are statutes 
restricting the rights of an owner in relation to his prop- 
erty, yet such statutes, in so far as they tend reasonably 
to prevent injury to the public, and frauds among indi- 
viduals, are uniformly held constitutional." 

With reference to class legislation the court contends 
that "it is well known that the business of retailing goods, 
wares and merchandise is conducted largely upon credit, 
and furnishes an opportunity for the commission of 
frauds upon creditors not usual in other classes of busi- 
ness. In fact, charges of fraud made against retail 
dealers who have sold their stocks in bulk are among the 
most common with which the courts are called upon to 
deal. Legislation therefore which restricts the absolute 
right of persons engaged in such business to transfer 
their property, so long as it applies to all persons engaged 
therein, is not class legislation within the meaning of the 
constitution, merely because it does not apply to all 
owners of property." 

The court also concludes that the Act is not in restraint 
of trade; that it does not prevent the sale of goods in 
bulk; and although it will restrict the sale of goods in 
this manner it is only one of the cases "where private 
desire must yield to the public good." 

The contention that bulk sales laws interfere with the 
freedom of contract and are in restraint of trade is best 
answered by Justice Vann of the Court of Appeals of 
New York in giving the dissenting opinion of the court 
which stated the bulk sales law of that state unconstitu- 



376 MERCANTILE CREDIT 

tional. With reference to this the former law, the decision 
says, "When a merchant owes more than he can pay he 
has no substantial equity in his stock of 
Appeals goods, and the claims of his creditors are supe- 
decision rior to his own. He may be imprisoned on 
in New ^jjyji process and punished criminally for mak- 
ing a fraudulent disposition of his property, 
and any person who is a party or privy to the fraud may 
be punished in the same way. Interference with his 
liberty and property by such methods has never been 
successfully questioned as a violation of fundamental 
rights. Many restraints upon the freedom of contract, 
some of which reach back to colonial history, have passed 
without challenge, or, if challenged, have uniformly been 
sustained as valid. The Statute of Frauds, the act to 
prevent fraudulent conveyances, insolvent laws, the 
Recording Act, the prohibition of usury, lien laws, regula- 
tions in relation to chattel mortgages, conditional sales, 
and preferences by corporations in general assignments, 
show in how many ways and in what varied forms the 
legislature may properly restrain freedom of action in 
commercial transactions in order to promote the general 
welfare." The decision goes on to say further that '' Such 
interference with liberty and such limitation upon the use 
of property, although arbitrary and inconvenient, have 
always been regarded as valid in order to prevent fraud 
and to promote justice. While commerce is hampered 
to a limited extent in some ways, it is protected and pro- 
moted to a much greater extent in other ways." 

With reference to the "freedom of contract" the 



THE SALE OF GOODS IN BULK 377 

decision goes on to say: "Is freedom of contract inter- 
fered with more by requiring notice of creditors before 
certain sales are made than by forbidding certain other 
sales altogether? The statute is intended to interfere 
only with those who buy and sell in bad faith toward the 
creditors of the vendor. It doubtless interferes with 
some who act in good faith, but so do the other statutes 
referred to. In order to prevent injustice and fraud, leg- 
islation for time out of mind has placed some restraint 
upon commercial transactions, and where the legislature 
has jurisdiction to act the method of suppressing the evil 
is wholly within its sound discretion." 



INDEX 



Accomodation paper, 45 
Adjustment Bureaus, 184-199 
Amendments of 1870, 308, 309; 

1874, 309, 310, 312; 

1903, 332; 1910, 334 
Assets, 116, 117 
Assignees, 285, 300, 301 
Attorney as source of credit 

information, 122, 165- 

167; 
as Collectors, 208 

Babylon, 8 

Bank note, 21 

Bank references, 167 

Banker, 13 

Banking credit, 38, 39, 40, 42, 

43, 44, 45, 55, 77, 78, 

103 
Banking functions, 39, 40 
Banking institutions, 12, 13 
Bankrupt, 256, 263, 264, 266, 

267, 302, 322, 323 
Bankrupt Law of 1800, 257- 

272 
Bankrupt law, purposes of a, 

275 
Bankruptcy, 331 

in New England, 351 
Bankruptcy Act of 1841, 273- 

292; 1867, 293-315; 

1898, 316-344 

advantages of, 343, 344 

Bankruptcy legislation, 247- 

256, 342 



Bankruptcy proceedings, 252, 

253, 254, 265 
Barter, 10, 14 
Bill of exchange, 7, 8, 31, 32, 

33 
Bill of lading, 33, 34 
Blackstone on bankruptcy, 261, 

262 
Bonds, 25, 26, 50 
Book account, 11, 21, 22, 23, 

67, 68, 69 
Book-keeping and credit, 99, 

119 
Bulk sales' laws, 357-377 

Capital, 9, 17 

Card index system, 174, 176 

Checks, 26, 27, 28 

Cheque bank, 28 

Cicero, 7 

Closing of estates, 186, 187, 

192 
Code of XII Tables, 7 
Collateral loans, 46 
Collection letter, 207 
Collections, 15, 200-210 
Collector, 200 
Commercial loan, 14 
Compositions, preventive, 254, 

337 
Confidence, 14, 15 
Connecticut bulk sales' law, 

364 
Corporations, 60, 338, 339 
Courts of bankruptcy, 321 



379 



380 



INDEX 



Credit, 9, 10, 13, 15, 17, 18 
kinds of, 37, 41, 58, 59 
Credit department, 46, 132, 

200 
of banks, 130, 131 
Credit economy, 4 
Credit Exchange Bureau, 170- 

183 
Credit information, sources, 61, 

63, 96 
Credit inquiry forms, 111,164 
Credit instrument, 19, 65 
Credit limitations, 128-130 
Credit man, 94-107, 160 
Credit Men, National Associa- 
tion of, 225-241 
Local Association of, 228, 

235, 241-243 
Credit Men's Association, 172, 

191 
Credit office, 108-133 
Credit reference, 125 
Credit report system, 175, 176 
Credit transactions, 13 
Creditors, 7, 84, 248-250, 305, 

326 
Crisis of 1893, 217-218; 1837, 

281 

Dating ahead, 70-73, 222, 223 
Debtor, 248, 249, 250, 252, 
264, 305, 322, 326 

discharge of, 254, 286, 302, 
303, 304, 331, 350, 351 
Debts, 325 
Definitions, 19 
Dominus, 6 
Drafts, 11 

bank, 30, 31, 32 



Drafts to collect accounts, 205, 
206, 207 

Economic evolution, 4 
Economic goods, 17 
Emperor Leo, 7 
Europe, 9 

Fairs, 9 

Family ledgers, 6 

Fawcett, 4 

Federal courts, 278, 279, 296- 

298 
Floating loans, 47 
Foreign bills of exchange, 9, 11 

Greece, Banking systems of, 8 

Hildebrand, 4 

Insolvent, definition, 346 
Insolvency law, 352, 356 
Insolvency legislation. State, 

345-346 
Installment sales, 90, 91 
Insurance, 117,. 118, 240 
Interest rates, 63, 64, 79 
Inventory, of goods to be sold, 

361 
Investment credit, 48, 53 
Involuntary bankrupt, 338 
Involuntary bankruptcy, 283, 

284, 304, 318-320, 347 
Involuntary insolvency law, 

347-348 
Involuntary law, to repeal, 
313 

Johnson, 10, 1& 

Laughlin, 4, 14 
Legislation, 248, 258 



INDEX 



381 



Letters of credit, 29 

Levasseur, 18 

Louisiana Bulk sales' law, 361 

Macleod, 4, 5 

Manufacturing industry, 12 

Markets, 9 

Medieval times, 9 

Medium of exchange, 10 

Mercantile agency, 134-157 

Mercantile credit, 38, 42, 51, 
54-58, 75-77, 103, 213, 
214 
and depressions, 211-224 

Mercantile industry, 94 

Mercantile loans, 16 

Merchants, 9 

Michigan Supreme Court's de- 
cision on Bulk sales' 
law, 373, 374 

Mill, 4 

Minneapolis system, 173 

Money, 10, 16 

Money changers, 9 

Money economy, 4 

Mortgage loans, 16 

Natural economy, 4 
Negotiability, 8, 20 
New Orleans system, 173 
New York Court of Appeals 

decision on Bulk sales' 

laws, 376, 377 
Note broker, 66 

Ohio Law, 366, 370 

Ohio Supreme Court decision 

on Bulk sales' law, 

368-372 



Oregon Bulk sales' law, 362, 

363 
Over-trading, 215, 216 

Pandects, 5 

Paper money, 47 

Personal credit, 38, 43, 75-93 

Petitions, 340 

Preferences, 284, 285, 325, 

330 
Preferred debts, 350 
Primitive credit, 5 
Productive process, 13 
Promissory note, 11, 19 
Property statement, 112, 127 
Public credit, 12 

Reformed code, 6 
Registers, 296, 297, 298, 307 
Rome, 8 

South CaroUna Bulk sales' law, 

364 
Stipulation, 7 
Stock certificates, 24 
Stock, preferred and common, 

25 
Supreme Courts decision on 

Bulk sales' law, 364 

Terms of credit, 62 
Torry Bill, 327 
Traders, 259, 260, 274 
Traveling credit representative, 

168, 169 
Traveling salesman, 122, 158- 

165 
Trustee, 324, 336 



382 



INDEX 



Voluntary bankrupt, 338 
Voluntary bankruptcy ,282, 283, 

299, 318, 347, 348 
Voluntary insolvency laws, 346 
Voluntary insolvency in Utah, 

349 
Voluntary law, 329 



Wage earner, 13 

Warehouse receipt, 35-36 

Washington's Supreme court 
decision on Bulk 
sales' law, 374, 375 

Wealth, 17, 18 

Webster, Daniel, 17 



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